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Cochran v. Smith

54 N.Y. Super. Ct. 117 22 Jones & S. 117 Court N.Y. Super. Ct. Decision date 1886-12-30 English

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SILAS W. COCHRAN, Appellant, v. BENJAMIN E. SMITH, et al., Respondents.

Headnote

Limited corporations—Liability of directors under §§ 14, 18, 21, chap. 611 Laws 1875—Eeturn of execution not necessary to—statute of Limitations as affecting.
Under section 14 of chapter 611 of Laws of 1875, prohibiting the issue by a corporation organized under that law, of stock or bonds, except for money, labor done, or property.....at its fair value, an action cannot be sustained against the directors by a creditor of the company unless it appears that he, as such creditor, suffered damages from the acts of the directors violative of this section.
After the appointment of a receiver of a corporation and Ms entry into possession, the directors are under no duty to file an annual report, under section 18 of said Act; and their omission so to do aifords no ground for an action against them.
After the directors have, under their then view of the law (wMch was correct), failed to file an annual report for one year, their subsequent action under another and mistaken view of the law, of filing an annual report for a subsequent year, will not estop them from insisting that they were under no obligation to file either the report which they omitted to file or the one which they did file.
Return of execution against the company unsatisfied is not a condition of a cause of action against the directors; such return does not prescribe the period at which the statute of limitations begins to run against an action based on the 14th, 18th, or 21st sections of said Act.
Before Sedgwick, Ch. J., and Freedman, J.
Decided December 30, 1886.
Appeal by plaintiff from a judgment in favor of defendants entered upon a verdict directed by the court, and from an order denying a motion for a new trial.
The complaint contained four causes of action: 1st, one based on a violation by the directors of the provisions of section 14 of chapter 611 of the Laws of 1875; 2nd, one based on section 18, requiring an annual report
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to be made and filed, it being alleged that such report was not made and filed within twenty days after January 1, 1881; 3rd, one for not keeping painted in a conspicuous position its name, with the word “limited;” and 4th, one for filing a false report on July 1, 1880.
On the trial the third cause of action was abandoned.
Samuel JE. Brown, attorney, and Tracy Gould, of counsel for appellant, in the question considered in the opinion, argued:
I. In determining the correctness of the disposition of the case made by the court on the trial, every contested fact must be deemed established in favor of the appellant, who is also entitled to the most favorable inferences deducible from the evidence. And upon this appeal it must be assumed that the causes of action set forth in the complaint exist, and that defendants are liable thereon, unless they are barred by the statute of limitations (Clemence v. City of Auburn, 66 N. Y. 334 ; Rehberg v. Mayor, 91 Ib. 137-141). It must, therefore, be taken for granted that the defendants parted with the capital stock of the company for property at more than its fair value.
II. Directors of limited liability companies, organized under chapter 611 of Laws of 1875 (as the Rockaway .Beach Improvement Company was organized) are merely trustees for the benefit of creditors. In the English statutes regulating like corporations, the corresponding officers are called trustees. So long as they violate no provision of the statute, so long as they see that none of the capital stock is issued except for cash or property at its actual and fair value (see § 14), and at the same time see that the total indebtedness does not exceed the amount of the capital stock (see § 22), there must be in their hands a fund with which to pay all creditors in full. It will be seen that this parting with the capital stock for property at more than its fair value is made the plaintiff’s first cause of action. To the direction of
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the statute above referred to (§ 14) no express penalty is attached. It is merely declaratory of the common law and the dereliction of the trustees in wasting and dissipating the trust fund makes them liable. To this liability—one growing out of the relation of the directors to the corporation’s creditors as trustees of the corporate property and existing at common law, not created by statute—the three years’ statute of limitation does not apply, and the court erred in holding that it did. The three years’ limitation does not apply, because § 14 of the Act, whose express provisions these defendants violated, does not, nor does any other part of the Act, or any other statute, “ impose a penalty or forfeiture,” or “ create a liability” for such violation. And it has been expressly held that the three years’ statute of limitations has only application in such cases to an action to recover a penalty or enforce a liability created by a statute (Brinckerhoff v. Bostwick, 99 N. Y. 185 ).
III. There is another consideration which takes the present action out of the operation of the statute of limitation. As to all of the rights of action given by the statute itself, appellant could not have sued the defendants on his judgment against the company until after execution was issued on the same and returned unsatisfied. Execution was issued on said judgment December 19, 1888, and return was made thereon December 29, 1883, and filed January 7, 1884. So much of plaintiff’s cause of action as is contained in said judgment is therefore clearly outside the statute.
IV. The filing of the false report, January 19, 1882, also takes the cause of action thereon out of the operation of the statute. Even if, as the trial court held, there was no duty on the part of the defendants to file a report at that time, yet they having filed one, and plaintiff having relied on that to determine the limitation of his action, the defendants are estopped from asserting that there was no duty on theii part to file the same.
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W. M. Safford, attorney, and Horace Russell, of counsel for respondent Kidder, and Billings & Cardozo, attorneys, and Coles Morris, and Michael H. Cardozo, of counsel for respondent Attrill, on the questions considered in the opinion, argued:—
I. The second cause of action is to charge respondent as a director under § 18 of the statute, because the corporation did not within twenty days after January 1, 1881, make and file an annual report. A receiver having been appointed in August, 1880, and having filed his bond and taken possession of the property of the company, no report was necessary after that date, and no liability can be predicated upon the failure to file such report (Huguenot National Bank v. Studwell, 74 N. Y. 621 ; Bonnell v. Griswold, 80 Ib. 128; Bruce v. Platt, 80 Ib. 379; Losee v. Bullard, 79 Ib. 404; Kirkland v. Kille, 99 Ib. 390; Slee v. Bloom, 19 Johns. 456 ; 20 Ib. 669 ; Penniman v. Briggs, Hopkins, 300; 8 Cow. 387 ; Bank of Poughkeepsie v. Abbotson, 24 Wend. 479 ). The cases of Brinkerhoff v. Brown ( 7 Johns. Ch. 225 ), Bradt v. Benedict ( 17 N. Y. 93 ), Sanborn v. Lefferts (58 Ib. 179), are distinguishable.
This being a penal statute, the courts will not undertake to enforce it, except in a case that is clearly within the meaning and intent of the statute as well as within its letter. It has been shown that the spirit of the statute does not demand a report under the circumstances of this case. The object of the Act should control. “ Even though the letter of the Act might apply to the case, if it were not within the mischief intended to be prevented or remedied by it, mor within its spirit and intention, it is not within its provisions ” (Bronson v. Dimock, 4 Hun, 614 ; Briggs v. Easterly, 62 Barb. 51 ).
n. The' fourth cause of action is based upon § 21 of the statute, for filing an alleged false report on July 1, 1880, stating that the amount of the capital stock was paid in full. It is well settled that actions brought upon this section must be brought within three years after
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the cause of action accrues (Merchants’ Bank v. Bliss, 35 N. Y. 412 ; Code Civ. Pro., § 38, subd. 3). The cause of action accrues when there is a concurrence in point of time of a false report, and the existence of a debt (Veeder v. Baker, 38 N. Y. 160 ; Losee v. Bullard, 79 Ib. 404).
The debts of this corporation were all created prior to the appointment of a receiver in August, 1880. This suit was not commenced until January, 1884, and not within three years.
m. Each defendant appearing by a separate attorney and interposing a separate defense, and all succeeding, each was entitled to a separate bill of costs (Royce v. Jones, 23 Hun, 452 ; Williams v. Cassady, 22 Ib. 180; Del., L. & W. R. Co. v. Burkard, 40 Ib. 625).

I shall refer only to such grounds as the learned counsel for appellant has presented for the reversal of the judgment. The action was brought by plaintiff claiming as a creditor of the Boclcaway Beach Improvement Company (Limited), against the defendants as directors of that company, which was formed under chapter 611 of the Laws of 1875, for default, as claimed by the complaint, in their conduct as directors.

The appellant’s counsel argues that the first cause of action, in the complaint, is for a violation of the 14th section of the Act, in their parting with the capital stock of the company for property at more than its fair value. If, which is more than doubtful, the plaintiff has any cause of action against directors, under the statute which declares that no “ corporation organized under this act shall issue either stock or bonds except for money, labor done, or property actually received for the use and legitimate purposes of such corporation, at its fair value ” (§ 14), it is clear that there were no damages to the plaintiff, as creditor, from the acts of the directors. The transaction, in fact, benefited the creditor to the extent

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of the value of the property acquired by the company, while, on the other hand, there is no proof or presumption that if the stock had not been issued as it was issued, any other or greater value, especially not the nominal amount, could have been procured for it. For this reason it becomes immaterial to examine whether the action under this statute may be brought within six years from the time the cause of action accrued. It may, however, properly be said that the case is not like Brinckerhoff v. Bostwick ( 99 N. Y. 185 ). If the defendants were liable, they would be so, not because they wasted the fund, that is, the capital stock, as is argued, for there is no proof that, in a pecuniary sense, the transaction was injurious to creditors, but because they took part in an act fordidden by the statute.

The next proposition is that the three years’ limitation applied by the court below to all the causes of action, was not to be calculated-until after the return unsatisfied of the execution issued upon the judgment which the plaintiff had recovered against the company. The counsel did not cite any provision of the statute which makes the return of an execution unsatisfied a condition of a cause of action against directors. I have not been able to find such a provision.

The court below held that the directors were not bound to file an annual report, at any time subsequent to August 20, 1880, because on that day a receiver of the company had been duly appointed, and who had, within three days thereafter, gone into possession of all the property of the company. For this reason the court held that the defendants were not liable for not filing a report for 1881. They did, however, file a report in 1882, in the form provided in the statute for annual reports. For the appellant it is argued that the filing of this report estops them from now claiming that it was not their duty to file a report in 1881. The directors, not having a duty to file a report after all the property of the corporation has been trans

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ferred to a receiver, does not depend upon any view the directors may take of the facts, but depends upon the condition of the company in fact. When this condition exists, the law pronounces that the filing of further reports would be useless, for they would not serve any purpose that the statute had in view in providing for annual reports. The fact that, in 1882, the directors took a different view of the law, is immaterial to the question of their duty in 1881.

The counsel for respondents argued as to other propositions than those that have been now examined. What has been said has referred to all the questions raised by the appellant. It is unnecessary to answer any others.

Judgment affirmed, with costs. Any question as to defendants having costs severally may be raised upon settlement of the order to be entered on this decision.

Freedman, J., concurred.

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