Halstead v. Dodge

Headnote

Corporations—liability of trustees, for not filing reports—parties defendant—error in election of trustee, effect on liability—obligation of corporation to file annual report—stochholder, what sufficient to constitute.

Plaintiff may bring his statutory action, in case of failure to file the annual report, against such of the trustees of the corporation as he may select; therefore, if there are three or more trustees, and the action is brought against but two, the non-joinder of the others constitutes no defense.

In case one of the defendants is a trustee whose election is not technically legally valid, where, as matter of fact, he was in form elected a trustee by those who had the right to elect one, if there was a vacancy to be filled, and thereafter acted as trustee, and while acting as such, there is a failure to make and file the report required by law, he must be held liable on any such default between the time of his election and resignation ; his not being a stockholder will not exempt him from liability.

Annual filing is necessary as to all corporations, notwithstanding chap. 510 of law of 1875. That chapter amending § 12 of the Act of 1848, must be read in connection with that section as it stood before the amendment; and thus read, whether the first report under the requirement of the amendment is to be made in January, 1876, or January, 1877, a further report must be made twenty days from the first day of January in each year thereafter.

Where a certificate is filled out and signed by the president and secretary it constitutes the person named in it a holder of the shares specified therein, although the corporate seal is not affixed; and although it is not detached from the certificate book, the party named in it being in the case at bar the secretary of the company.

Appeal by defendants from judgments entered on the reports of a referee.

The facts sufficiently appear in the opinion of the referee, which was as follows :

Each of these actions is .brought against the defendants as Trustees of the “ Pyrolusite Manganese Company, ” a manufacturing corporation, to recover the amount of a debt alleged to be owing by I he corporation to the plaintiff. In each case it is sought to charge the defendants as such trustees, because the said corporation did not, within twenty days from the first of January, 1882, make and publish and file a report as required by law in such case made and provided, and also because the corporation has not since then made, published and filed such a report; these actions were commenced in March, 1883. Some questions common to both actions will be first considered. The defendant Dodge alleges in his answer in each action that one E. H. Woodward “ at all the times alleged in the complaint was a co-trustee "with this defendant of the Pyrolusite Manganese Company and was and is a necessary party to this action.” The defendant Pond has not set up this defense ; his answer in each action consists of a general denial of the allegations of the complaint. The defendants .insist that as the statute makes the trustees jointly and severally liable, they must be sued separately or jointly ; that by bringing an action against more than one trustee, the plaintiff has elected to treat these as jointly liable, and that his complaint is fatally defective because he has not made all the trustees parties defendant. The common law rule that persons jointly and severally hable, must ah be made defendants, if more than one of those thus liable were sued, applied only to actions arising ex contractu (Graham Pr. 2d Ed. 91). As to actions ex delicto the rule was different. In such a case the injured party could sue one, all or any number of them (Ib. 93, and cases there cited). Under the statute which subjects trustees to the liability here sought to be enforced, the liability is imposed for a neglect or omission to perform a duty which the statute enjoins. Bo right of recovery is based upon any contract, made or alleged to have been made by the trustees ; it is based on their misconduct, for which, when established,

they are subjected to a liability which the statute affixes as the penalty for such misconduct. I think, therefore, that this defense is unavailing (Strong v. Sproul, 4 Daly, 326 ; Quigley v. Walter, 2 Sweeny, 175 ).

It is objected on behalf of the defendant Pond, that he was not at any time a trustee of the company.

He was as matter of fact elected a trustee on July 12, 1881. On that day the trustees were Edward H. Woodward, Charles 0. Dodge and Pauline Woodward. All the stockholders were represented at that meeting, and all ‘the votes cast were in favor of such election. He ivas elected in the place of Pauline Woodward, whose resignation was presented at that meeting and accepted. Her resignation was in terms conditioned “to take effect after the legal election of the fourth trustee ” named in contract, bearing date June 29, 1881. The word “ legal ” is interlined and is in a different ink from the residue of the written resignation, but when or by what authority it was inserted was not shown. By the articles of incorporation, the business of the corporation was to be managed by three trustees. It does not appear that any appropriate action has been taken to make four, the number of the trustees. It would seem from the evidence that A. T. Woodward was elected a trustee at the same time. The. acting trustees at that time were Edward H. Woodward, the president, and the defendant Charles E. Dodge. After the election of Pond and of A. T. Woodward, there were in form four trustees. As Pond was elected trustee in place of Mrs. Woodward, there is some force, as I think, in the position that he was legally elected a trustee, unless the condition of Mrs. Woodward’s resignation, as it was not literally and legally complied with, rendered such election a nullity. If she had resigned unconditionally, and Pond had thereafter been duly elected a trustee in her place, I do not see that the validity of his election could be questioned, merely because then or thereafter, there was a fourth trustee elected, without such prior action having been taken as would ho

necessary to make the election of a fourth trustee legal. Mrs. Woodward’s resignation was in fact accepted, and Pond was elected as her successor. He then believed that he had been duly elected a trustee.

About June 26, 1883, he formally resigned as trustee, and the five shares of the stock of the company which had stood in his name, from the time of his election as trustee, on the books of the company, was transferred to Chas. 0. Dodge, and on the evidence given, presumably at the request of Pond.

In the meantime, Pond, though evidently paying but very little attention to the details of the company’s business, did various acts as secretary of the company. As such secretary, he signed notices of proceedings had, and also certificates of the ownership of stock in the company. On or about June 3, 1882, Pond and Dodge “as Trustees of the Pyrolusite Manganese Company,” presented a petition to the supreme court, in which they prayed “for a final order, dissolving said corporation and appointing one or more receivers of its property, and for such other relief as may be just.” That petition alleges “that the said petitioners are one-half in number of the trastees of the Pyrolusite Manganese Company.” It was signed by Dodge and Pond, and verified by them on June 3, 1882. In the verification they, each for himself, swore, “that the matters of fact stated in the foregoing petition and schedule thereto annexed are just and true, so far as he knows, or has the means of knowing.” On that petition, the supreme court made an order, on the 5th of June, 1882, by which, among other things, it was “ ordered that all persons interested in the said corporation show cause” (at a time and place named, before Horace 0. Chittenden, appointed a referee for that purpose, “why the prayer of the petitioners should not be granted.” On December 29, 1882, the defendant Pond was examined as a witness under this order of reference, and testified thus, viz.: “ Q. You are, or suppose yourself to be one of the

trustees ? A. I suppose myself to be ; yes, sir. Q. How many shares of stock do you own ? A. Five shares.”

The evidence justifies the conclusion, that litigation on the orders, made on the petition, was going on at the time that Pond resigned his trusteeship, in June, 1883.

On April 17, 1883, he attended a meeting of the trustees, at which time the trustees proposed a resolution, removing Edward H. Woodward from the office of president of the company, and elected Chas. 0. Dodge president. Pond voted for the resolution, stating at the time of so voting, according to his own testimony, “If I am a trustee, I vote so and so.” This being translated means, as I understand it, that he said when he voted, “ If I am a trustee of this company, I vote aye, ” (or in favor of the resolution). After the vote was taken a notice was sent to Woodward, and published in one or more newspapers, signed by Pond as secretary of the company, declaring that at a stated meeting of the board of trustees of the company then held, Woodward was removed from the office of president of the company, and that Dodge was elected the president.

I think that Pond cannot claim exemption from the liability imposed by statute upon the trustees of such a corporation, on the ground, that, technically, his election was not legally valid.. As a matter of fact he was in form elected a trustee by those who had the right to elect one, if there was a vacancy to be filled. He supposed then that he was legally elected, and there is no reason to doubt that those who voted for his election supposed it to be legal. Without imputing to him motives which I think do not exist, he must have believed when he verified the petition before referred to, that he was in fact a trustee legally elected. Besides continuing to prosecute that petition as such trustee, up to the time of his resignation of the office, he acted as trustee at a meeting held in April, 1883, at which Woodward was removed from the office of president and another person was appointed president of the company. Without his presence and action at the

meeting there could no pretense that the removal of Woodward from office was effected.

Easterly v. Barber ( 65 N. Y. 252 ), was a contest between the plaintiff, who had acted as trustee (but claimed not to have been legally elected a trustee) and his co-trustees, to recover from these co-trustees the amount of a debt owing to the plaintiff by the corporation, of which they were such trustees, on the ground of the omission to make and file the report required by law. The court held (Ib. 262), “that a person having voluntarily assumed the character of a trustee shall not be permitted to deny, either as to his co-trustees, or the cestuis que trust, that he held that character, or to disavow his acts in that capacity. Accordingly, the failure to file the report in this case was the plaintiff’s failure as well as that of his associates. They could only be held hable with him to a creditor who had been aggrieved by their conduct. The plaintiff has not been injured. The penalties of the statute were not given for his protection.”

The logical conclusion to which this decision leads is, that if his co-trustees should be compelled to pay debts owing by the company, because they had not made and filed such a report, that they could recover from him his alleged part of the sum which they had thus been compelled to pay. That being so, they would not seem to be any good reason why such creditors could not recover from him directly. The language of the opinion imputes that. They would only be held liable with him to a creditor who had been aggrieved by their conduct. If he would be held hable with them, he would be held hable if sued separately.

The act of Pond in filing the petition previously mentioned with a view to have the corporation dissolved and a receiver of it properly appointed, was an act of peculiar significance. Without the allegation that he was a trustee of the company, the court would not have had jurisdiction to act on the petition. The object and intent of that proceeding, was to take property of the company out of

the hands and control of the persons elected by the stockholders to manage its business. The result sought would change the relations of each creditor of the company to it, and impose the necessity upon them to resorting to other remedies then such as they would have had so long as the corporation remained undissolved. It would seem to be fitting in such a case, to carry the rule enunciated in Easterly v. Barber (supra), so far as to hold, that a trustee thus acting, although perhaps not legally elected, was hable to the creditors of the corporation, who were such, while, during his trusteeship, there was a failure to make and file the report, required by law. I think he must be held liable on any default to make and file a report between the time of his election as trustee, and the time of his resignation of the office.

But it is further objected that Pond was not a stockholder. If this were so he would nevertheless be hable if the views above expressed are sound.

One acting as trustee cannot be held to be exempt from liabihty as trustee merely because he was not a stockholder. But I think he was a stockholder. On the books of the company he appeared to be the owner of five shares of the stock; certificate (No. 43) was filled up and signed. It was signed by the president and Pond as secretary of the company. This transfer of stock to him was doubtless made to satisfy the requirement of the statute that a trustee must be a stockholder. Although the certificate was not detached from the books, it was within the control of Pond, and he was at liberty to do with it as he pleased. Whether he paid for the stock or it was given to him is of no consequence. The fact that the corporate seal was not affixed to it while the stock stood in his name, did not prevent the title to it from resting on him. A person buying stock of the company or of the owner of it, who receives from the company a certificate of his ownership thereof, authenticated by the signatures of its appriate officers, will become the owner of such stock, al

though the officers may have omitted to affix to it the corporate seal.

It is further insisted that the question of liability of the trustees is to be determined by section 12 of the general law, as amended by chapter 510 of the laws of 1875 (p. 589). That this section, as thus amended, provides first for corporations where the certificate of incorporation had been filed more than a year prior to the 20th of January next after the passage of the act, and requires but one report in such cases. Next for corporations whose certificates of incorporation might have been filed less than one year from the 20th of January next after the passage of the act, and as to the latter class, a certificate must be made and filed in each successive year. In the nature of things, there is no reason why an annual report should be required in the latter class of cases which will not apply in equal force to the other class.

Section 12 of the act of 1848 requires that “every such company shall, annually, within twenty days from the first day of January, make a report, &c.” This act would require a report from a company though not organized more than thirty days prior to the succeeding 20th day of January. The change apparently intended to be made was, to dispense with the necessity of a report until after the lapse of one year from the filing of the certificate of incorporation.

The section, as amended, read in connection with the section amended, imports to my mind a requirement that annual reports be made, and specifies the time when the first report shall be made; and whether in obedience to this requirement—the first report required by this act shall be made in January, 1876, or in January, 1877, a further report must be made twenty days from the first day of January in each year thereafter. If these views are correct the only question left is, whether in January, 1882, or January, 1883, the corporation was a debtor to each of the plaintiffs, and the amount of such debt. Pond was a trustee ; no report was made in either of these

years, or before this action was commenced in March, 1883, or since then, so far as the evidence discloses.

The debt of the corporation to Halstead arose between July 25, 1882, and December, both days inclusive. Hal-stead had loaned to the company from time to time, moneys to be.used, and in fact used in the legitimate business of the company and to pay its current expenses, amounting to $4,313.40 over and above a payment of $182.30 made on account of such loans. All of this indebtedness was due and payable as early as December 11, 1882, besides interest on each sum loaned from the time it was due and payable.

This debt, therefore, was contracted while Pond was a trustee, and was due before the time when the trustees should have made their report in January, 1883. On March 22, 1883, at the time this action was commenced, there was due from the corporation to the plaintiff the sum of $4,400.32.” . . .

The referee then considered the effect óf a payment made since the commencement of the action, and concluded as follows : this will leave due at the date of this report from the corporation to the plaintiff the sum of $4,057.94, which sum the plaintiff was entitled to recover.”

From the judgments entered upon the reports made pursuant to the foregoing opinion, defendants appealed.

on the propositions contained in the headnotes, argued :—I. The action should have been brought either against one or against all of the trustees of said company. Edward H. Woodward has always been a trustee of said company. The statute under which the defendants are sought to be held liable, provides that upon the failure of a corporation to properly make and publish a report, all of the trustees thereof shall be jointly and severally liable for certain debts of said corporation (Laws 1875, ch. 510). At common law, in all cases where parties are jointly and severally hable, the plaintiff must sue either each separately or all together (De Ridder v. Schermerhorn, 10 Barb.

638 ; Allen v. Fosgate, 11 How. Pr. 218 ; Dean v. Whiton, 16 Hun, 203 ; 1 Chitt's Pleadings, 30-49 ; 3 T. & R. 782 ; 1 Parsons Contr. 12). Neither the laws nor the code have changed this rule, except as to parties hable upon the same written instrument (Code, §§ 448,454 ; De Ridder v. Schermerhorn, 10 Barb. 638 ; Allen v. Fosgate, 11 How. Pr. 218 [220]; Dean v. Whiton, 16 Hun, 203 ; Strong v. Wheaton, 38 Barb. 623 ). Section 454 of Code, which is the only present authority for said exception, reads as follows : “ Two or more persons, severally liable upon the same written instrument, ” etc. This action is not brought against persons severally hable on the same written instrument, but to enforce a joint and several liabihty created by statute. The learned referee cites in his opinion, the ■decisions in the actions Strong v. Sproul ( 4 Daly, 326 ) and Quigley v. Walter (2 Sweeney, 195), in support of his rulings that Edward H. Woodward is not a necessary party to this action. Strong v. Sproul was reversed at the court of appeals (See 53 N. Y. 497 ). The action of Quigley v. Walter, was one where two of four trustees were named in the summons, but only one was served with summons or appeared, and where judgment was only taken against the defendant so served. The decision was based on the fact that while there was nominally two defendants, there was really but one defendant. The two cases cited do not, therefore, support the said referee’s opinion.

II. Pond was not a stockholder, and therefore could not be a trustee. Laws 1848, chapter 40, §3, provides that a trustee must be a stockholder. He never subscribed for, paid for, or had any of the stock of said company in his possession. No stock of the said company was ever issued or transferred to him. Certificate No. 43 for five shares of stock, which it is claimed Pond owned, was never sealed or cut from the certificate book. While it was made out in his name, it was also, on the day it was dated, July 12, 1881, indorsed in blank by him. There was, therefore, as much of a delivery from him back to the company as from the company to him. His ownership, if any, in the stock

was for only one day, and probably but for a moment. Further, the seal of the company was necessary to the issuing or transferring of stock thereof (By-laws, Art. XIII; B. fol. 128 ; H. fol. 114.)

The learned referee, in his opinion, states that the certificate was within Pond’s control. There is no proof to sustain that statement. Even if Pond had had the physical control of the certificate, he did not have the right to affix the corporate seal or to cut the certificate from the book.

III. It is settled in this state that the recovery allowed by statute against trustees for the failure of a corporation or its officers to make a report is a penalty. It is only officers de jure that come within the purview of the statute (Merchants’ Bank v. Bliss, 35 N. Y. 412 ; Garrison v. Howe, 17 Ib. 458 ; Adams v. Mills, 60 Ib. 536 ; Bonnell v. Griswold, 8 Ib. 128; Whitney Arms Co. v. Barlow, 68 Ib. 34). In this action it is extremely doubtful that there was ever any liability on the part of the company for the alleged indebtedness, and it is clearly proven that defendant, Pond, was not, in fact, a trustee of the company. The learned referee, in his opinion, states that Pond was at least a trustee de facto, and that a trustee de facto is hable to a creditor for a failure of the corporation to file an annual report, and cites Easterly v. Barber ( 65 N. Y. 252 ), as enunciating such a rule. This case can clearly be distinguished from the case at bar. In Easterly v. Barber, a de facto trustee brought an action against his co-trustee to recover for a failure to file an annual report, and the court held first, that one trustee could not bring such an action against his co-trustee, and second, that plaintiff was estopped from denying that he was a de jure trustee as against his co-trustee, and therefore could not bring the action. Anything further is obiter dicta. The case of Easterly v. Barber is not authority for the proposition that a de facto trustee is liable to a general creditor of the corporation for a failure to file an annual report. In the said case of Easterly v. Barber, the plaintiff was

invoking the aid of a penal statute, and the rale above stated, that nothing can be presumed against the defendant, &c., was applied, as it should be in the present action. A de facto trustee is not a trustee, though by the operation of the doctrine of estoppel his acts are for some purposes treated as the acts of a trustee. An officer de facto is not a good officer in point of law (King v. Corporation of Bedford Level, 6 East, 368). Only de jure trustees can be held hable for a failure to file an annual report under the statute. It is not the duty of persons who are not legally trustees to make and file a report, (Craw v. Easterly, 4 Lan. 513 ; aff'd 53 N. Y. 679 ). Pond was never in such a position that he could have legally made or filed a report, or that he could have compelled the trustees of said company to make and file such report, or join with him in making and filing the same, and therefore should not be held hable for the failure of the company to file a report.

IV. There was no obhgation on the part of the Pyrolusite Manganese Company to make or file a report after December 31, 1881, the law making such report necessary having been repealed, and hence there is no habihty on the part of the trustees in case of a default in making and filing such report. Section 12 of chapter 40 of the laws of 1848, by virtue of which section the defendants are sought to be held liable, was amended by chapter 510 of the laws b£ 1815, so as to read as follows : “Every such company shah within twenty days from the first day of January, if a year from the time of filing of the certificate of incorporation shah then have expired, and, if so long a time shah not have expired, then within twenty days from the first day of January in each year after the expiration of a year from the time of filing such certificate, make a report,” etc. Prior to this amendment the said section read as fohows : “Every such company shah annually within twenty days from the first day of January, make a report, ” etc. The amendment operated as a repeal of the former statute (Knox v. Baldwin, 80 N. Y. 610 ;

Victory Webb Printing Co. v. Beecher, 26 How. 48 ; Sedgwick Statutory Law, 104; U. S. v. Tyner, 11 Wall. 88 ; Dexter v. Allen, 16 Barb. 15 ; Moore v. Mausert, 49 N. Y. 332 ; People v. Supervisors, 67 Ib. 109 ; Angel v. Town of Hune, 17 Hun, 374 ). As the defendants were elected trustees of said corporation, as the alleged default was permitted, and as this action was commenced afier said amended statute went into effect, their liability in this action is governed by its provisions (Knox v. Baldwin, 80 N. Y. 610 ; People v. Supervisors, 67 Ib. 109). The amended section drops the word annually from the statute. It refers to two classes of companies, the one class being those whose certificates of incorporation had been filed for a year or more, and the other class being those whose certificates had not been filed for so long a time. Said section provides that the first class “ shall within twenty days from the first day of January,” make a report, etc., and that the other class “shall within twenty days from the first day of January in each year, after the expiration of a year from the time of filing such certificate, make a report,” etc. There is no requirement in said section that the first class of companies shall report “annually,” or “in each year,” or in fact make but one report. The Pyrolusite Manganese Company was incorporated in the year 1873, and therefore was not required by law to file a report after January 21, 1881. The defendants could only be held hable in this action in case the company had been incorporated since January, 1875 (Chapter 510, Laws 1875).

V. The said statute is penal (Merchants’ Bank v. Bliss, 35 N. Y. 412 ; Garrison v. Howe, 17 Ib. 458 ; Adams v. Mills, 60 Ib. 536 ; Garrison v. Howe, 17 Ib. 458 ; Bonnell v. Griswold, 80 Ib. 128 ; Jessup v. Carnegie, 80 Ib. 441 ; Hall v. Segel, 13 Abb. N. S. 178). The statute being penal in its character “nothing can be presumed against the defendant, and every fact necessary to establish his liability must be affirmatively proved, and this, although it can

only be done by proof of a negative ” (Whitney Ames Co. v. Barlow, 68 N. Y. 34 ).

on propositions stated in the head notes, argued:—I. The defendant moved to dismiss the complaint, upon the ground that under a strict interpretation of the original act, as amended by the act of 1875, there was no obligation on the part of the corporation to file any report after the year 1876 (Laws 1848, ch. 40, § 12 ; Laws 1875, ch. 510). This construction of chapter 510 of the laws of 1875 was recently repudiated by this court at general term (Vernon v. Palmer, 48 Super. Ct. 231). . And by the supreme court at circuit (opinion by Barrett, J.) and general terms (opinion by Daniels, J.), in Parsons v. Sprague, supreme court, 1st Department, Nov. 3d, 1883 (not reported).

II. The defendant moved to dismiss the complaint on the ground of the non-joinder of Edward H. Woodward, one of the trustees. This motion only applies to the defendant Dodge; non-joinder was not pleaded by the defendant, Pond. (1.) The motion was properly denied. Edward H. Woodward was a non-resident of the state, being a non-resident of the state it was not necessary to join him in any action (Angel v. Lawton, 76 N. Y. 540 ). (2.) It is no defense that a part only of the trustees are joined in an action under the statute (Quigley v. Walter, 32 Super. Ct. 175 ; Strong v. Sproul, 4 Daly, 326 ). This case (Strong v. Sproul) was reversed at the court of appeals ( 53 N. Y. 497 ) on the point of practice only, and the law as laid down by general term stands without contradiction or qualification. (3.) The principle claimed by the appellant, that in common law, where parties are jointly and severally hable, the plaintiff must sue one or sue all, is limited to actions ex contractu (1 Chitty Plead. 97, 98 ; Tyler Stephen on Plead. 27 ; Graham’s Practice, 2d ed. 91). As to an action ex delicto, the rule was different. In such a case the injured party could sue one, all, or any number

(Graham's Prac. 2d ed. 93, and cases cited; Strong v. Sproul, 4 Daly, 326 ). This is an action ex delicto, and not ex contractu (Bonnell v. Griswold, 80 N. Y. 128 ).

This defense must also fail, because there is no proof that this third trustee was within the jurisdiction of this court where the action was brought, and free from all legal disability (Angel v. Lawton, 76 N. Y. 540 ).

m. Bond certainly acted as trustee and assumed the position from July 12, 1881, to June 26, 1883, and he therefore is estopped from denying his trusteeship (Easterly v. Barber, 65 N. Y. 262 ).