Converse, Receiver v. Aetna National Bank

64 A. 341, 79 Conn. 163, 1906 Conn. LEXIS 29

• Court: Supreme Court of Connecticut
• Decided: July 30, 1906
• Status: Published

Opinions

Baldwin, J.

The Minnesota Thresher Manufacturing Company was organized in 1884, under the laws of Minnesota. Its articles of incorporation specified as the corporate purposes, the purchase, in whole or part, of the capital stock, evidences of indebtedness, and assets of the Northwestern Manufacturing and Car Company, and the manufacture of steam engines and certain other articles. The defendant became a shareholder in the Minnesota Thresher Manufacturing Company prior to 1899. At that time the Constitution of Minnesota declared that “each stockholder in any corporation, [excepting those organized for the purpose of carrying on any kind of manufacturing or mechanical business,] shall be liable to the amount of stock held or owned by him ” (Art. X, § 3); and the statutes of the State provided for the enforcement of this liability by a creditor’s bill brought in any of its District Courts which possessed jurisdiction to enforce it, and that in any such action a receiver might be appointed; that in all cases in which the directors, officers, or stockholders of a corporation were made parties to such an action, if its debts remained unsatisfied after applying its assets, including all sums due and remaining unpaid on the shares of its stock, the court should “proceed to ascertain the respective liabilities of the directors or other officers, and of the stockholders, and to adjudge the amount payable by each, and enforce the judgment as in other cases ”; and that in any such action the court might order notice to be published to all the creditors of the company, requiring them within a certain time to exhibit their claims and become parties to the action, under pain of being excluded, in default thereof, from all benefit under such judgment as might be rendered. Statutes of Minnesota (1894), §§ 5905, 5906, 5909-5911.

Under this state of the law, it was decided by the Supreme Court of Minnesota that no suit could be maintained by a receiver, either in or out of Minnesota, to enforce the liability of shareholders (over such amount as might be unpaid upon their shares) for the debts of a corporation; but that the sole remedy was by a single suit by a creditor in the courts of that State.'

In 1899 “An act to provide for the better enforcement of the liability of stockholders of corporations ” was passed. Laws of Minn. p. 315, Chap. 272. This authorized any receiver of a corporation within the scope of the constitutional provision, who had been appointed by any District Court either by virtue of the provisions of the statutes which have been previously described or under its general equity powers, to apply to it for an order of assessment against the shareholders. Upon such application, a time for a hearing was to be set and an order of notice made. At the hearing the court was to consider such testimony as might be' offered by him and by any creditors or shareholders, “as to. the probable indebtedness of s.aid corporation and the expenses of said . . . receivership, and the probable amount of assets available for the payment of such indebtedness and expenses; and also as to what parties are or may be liable as stockholders of said corporation and the nature and extent of such liability.” Then followed these provisions :•=—

“ And if it appear to the satisfaction of the court that the ordinary assets of said corporation, or such amount as may be realized therefrom within a reasonable time, will probably be insufficient to pay and discharge in full and without delay its indebtedness and the expenses of such . . . receivership, and that it is necessary or proper that resort be had to such liability of its stockholders; the said court shall thereupon by order direct and levy a ratable assessment upon all parties liable as stockholders, or upon or on account of any stock or shares of said corporation, for such amount, proportion or percentage of the liability upon or on account of each share of said stock as the court in its discretion may deem proper (taking into account the probable solvency or insolvency of stockholders and the probable expenses of collecting the assessment); and shall direct the payment of the amount so assessed against each share of said stock to the . . . receiver within such time thereafter as said court may specify in said order. Said order shall direct the . . . receiver to proceed to collect the amount so assessed against each share of said stock from the parties liable therefor; and shall direct and authorize said . . . receiver, in case of the failure of any party liable upon or on account of any share or shares of said stock to so pay the amount so assessed against the same within the time specified in said order, to prosecute actions against each and every such party so failing to pay the same, wherever such party may be found, whether in this State or elsewhere. Said order and the assessment thereby levied shall be conclusive upon and against all parties liable upon or on account of any stock or shares of said corporation, whether appearing or represented at said hearing or having notice thereof or not, as to all matters relating to the amount of and the propriety of and necessity for the said assessment. This provision shall also apply to any subsequent assessment levied by said court as hereinafter provided. It shall be the duty of such . . . receiver to, and he may, immediately after the expiration of the time specified in said order for the payment of the amount so assessed by the parties liable therefor, institute and maintain an action or actions against any and every party liable upon or on account of any share or shares of such stock who has failed to pay the amount so assessed against the same, for the amount for which said party is so liable. Said actions may be maintained against each stockholder, severally, in this state or in any other state or country where such stockholder, or any property subject to attachment, garnishment or other process in an action against such stockholder, may be found. But if said . . . receiver shall in good faith believe any stockholder so liable to be insolvent, or .that the expense of prosecuting such action against such stockholder will be so great that it will be of disadvantage to the estate and the interest of creditors to prosecute the same, said . . . receiver shall so report to said court; and shall not be required to institute or prosecute any such action unless specifically directed' so to do by said court. And in such case said court shall not require said receiver to institute or maintain such action unless said court shall have reasonable cause to believe that the result of such action will be of advantage to the estate and creditors of said corporation; except as hereinafter provided.”

When the defendant acquired its shares in the Minnesota Thresher Manufacturing Company, as the latter was not incorporated solely for manufacturing purposes, its shareholders were, in favor of its creditors, subject to a double liability, under the Constitution and laws of Minnesota. This lias been expressly determined by the highest court in that State, and on grounds which seem to us impregnable. State ex rel. Clapp, Atty.-Gen., v. Minnesota Thresher Mfg. Co., 40 Minn. 213, 41 N. W. 1020 ; Merchants’ Nat. Bank v. Minnesota Thresher Mfg. Co., 90 Minn. 144, 95 N. W. 767. The company was formed for several purposes, one of which was to buy up the shares of stock and indebtedness of an existing manufacturing corporation. Such a purchase would not be an act directly and naturally incidental to carrying on a manufacturing business. The exception made by the Constitution in favor of manufacturing corporations was not one to be extended by construction.

As it is admitted on the face of the pleadings that the defendant acquired its stock duly and lawfully, no question of ultra vires arises. California Bank v. Kennedy, 167 U. S. 362, 17 Sup. Ct. Rep. 831. It therefore incurred, by becoming a shareholder in a Minnesota corporation, a liability to perform such contractual obligations as were attached by the laws of Minnesota to the ownership of its capital stock. Fish v. Smith, 73 Conn. 377, 380, 84 Amer. St. Rep. 161, 47 Atl. 711.

One of these obligations was to be answerable for the debts of the corporation, in case of a deficiency of corporate assets, to the extent of the par value of its shares of stock. Hawthorne v. Calef, 2 Wall. (U. S.) 10, 22; Ball Electric Light Co. v. Child, 68 Conn. 522, 525, 37 Atl. 391. The amount of this liability could not be thereafter increased by subsequent legislation: the mode of enforcing it could be varied within reasonable limits. A corporation organized under general incorporation laws, whether there be or be not a statutory reservation of a power of amendment or repeal, holds its franchises necessarily subject to the right of the State to change those general laws, and their application to existing corporations, in any. manner not prejudicial to vested interests of the latter or of its creditors or stockholders, nor inconsistent with the terms of the implied contract of the latter. To enlarge the remedies of its creditors, whether against the corporation or its shareholders, impairs the obligation of no contract. Hill v. Merchants’ Mut. Ins. Co., 134 U. S. 515, 525, 10 Sup. Ct. Rep. 589.

The Supreme Court of Minnesota has held that the Act of 1899, so far as concerns the change of procedure, added' nothing to the obligations of those who at the date of its passage were shareholders in a Minnesota corporation. Straw & Ellsworth Mfg. Co. v. Kilbourne B. & S. Co., 80 Minn. 125, 137, 83 N. W. 36.

The defendant contends that it added to them in at least two points, to an extent not to he justified as a change of procedure: first, by purporting to join to the liability for the debts of the corporation a liability to assessment by a court of Minnesota for the expenses of any receivership constituted by that court for the benefit of those to whom such debts are due, including such expenses as might he incurred by the receiver in enforcing, whether in or outside of that State, the' statutory liability of any and all shareholders ; and second, by purporting to make such an order of assessment as that on which the plaintiff sues conclusive as against all shareholders (whether appearing or represented at the hearing of which it was the result, or having notice thereof or not), “ as to all matters relating to the amount of and the propriety of and necessity for the said assessment.”

Before the Act of 1899, the expenses of a receivership under a creditor’s bill were chargeable against any equitable assets of the defendant that could be reached, and the creditor himself might he allowed from the same source a reasonable sum for his own services and disbursements. Frost v. St. Paul B. & I. Co., 57 Minn. 325, 59 N. W. 308; Helm v. Smith-Fee Co., 79 Minn. 297, 82 N. W. 639. To whatever extent the fund might be thus depleted, the amount of the indebtedness of the judgment debtor, remaining unsatisfied, would necessarily he increased; and there would be just so much moi'e for the shareholders to pay in discharge of their double liability. But we are pointed to no decision of the Minnesota courts to the effect that any expenses of the receiver of an insolvent corporation that might be incurred in the institution and maintenance of distinct suits to be thereafter brought against individual shareholders could be taken into account under the law and practice existing prior to the Act of 1899, in ascertaining what sums shareholders must pay in discharge of this double liability. See Harper v. Carroll, 66 Minn. 487, 495, 508, 516, 69 N. W. 610, 1069. The Act of 1899 distinctly authorizes the court in which such a creditor’s bill is pending to make an assessment of this nature.

Every shareholder in a corporation has a voice in the control of its affairs. It can contract no debts except under the authority of those chosen by the owners of a majority of its capital stock, or such of them as care to take part in the election. He may therefore be willing to assume' a risk of being answerable for such debts within certain limits, when he would not have assumed a responsibility for meeting an indefinite sum for services and expenses never authorized by the corporation, nor enuring directly to its benefit. When the defendant acquired its shares in the Minnesota Thresher Manufacturing Company it promised to pay the debts of the corporation to the extent of the par value of its stock, in default of sufficient corporate assets. It agreed that, in determining whether there were sufficient corporate assets, there might be deducted from such as existed the expense of their collection, including that of any receivership incident to the statutory remedy by creditor’s bill. It agreed that the amount to which it might thus become liable might be determined by the Minnesota court having jurisdiction of the receivership proceedings. It did not agree that,-in determining it, there might be added to the liabilities, which it had thus assumed, a liability measured by the estimate of the court as to what might be thereafter necessary for future expenses of future suits to collect what were never corporate assets. To the provision of the Act of 1899 authorizing such an addition, it therefore had a right to say, Non Jiaee in foedera veni. The clause of the Constitution of Minnesota on which the plaintiff’s claim is based is in derogation of the common law and cannot be extended beyond the words used. Brunswick Terminal Co. v. National Bank, 192 U. S. 386, 24 Sup. Ct. Rep. 314.

The plaintiff insists that if this be so, the point is made too late and in the wrong court. He sues as a receiver, appointed by the District Court of Washington County in Minnesota, to collect an assessment against shareholders in the Minnesota Thresher Manufacturing Company made by that court on his application, in a suit against the corporation brought by one of its creditors in 1901, to take benefit of the Act of 1899. The application stated that the company was wholly without property of any kind out of which any of its debts could be satisfied; that the receiver had already incurred large expense in conducting the examination necessary to advise the court properly as to how many of the shareholders were solvent; that it was impossible then to determine what would be the total expense of administering his trust and collecting such sums as the shareholders might be liable for, but that it would amount to a very considerable sum. An order of notice to all parties in interest was thereupon made by the court and duly executed. No service of that, or of any process in the cause, was made upon the defendant in the present action within the State of Minnesota. Certain stockholders appeared at the time set for the hearing, and, after they were heard, an assessment of 36 per cent, of the par value of his shares was made against each shareholder. This assessment was based not only on the total indebtedness of the company as proved and allowed, but also on the estimated expenses of the receivership, including such as would be incident to the enforcement by subsequent actions of the shareholders’ liabilities for this indebtedness; a very considerable sum being thus added “ for the expense of collection and administration.”

The contractual obligation impliedly assumed by the defendant to pay the debts of the company, in case of its default, to the extent of a sum equal to the par value of its shares, was not an obligation due to the corporation. It was that of a surety, and only due to its creditors, or to such representatives of their interests as the law might create. Allen v. Walsh, 25 Minn. 543; In re People's L. S. I. Co., 56 Minn. 180, 185, 57 N. W. 468 (Spilman v. Mendenhall); Minneapolis Baseball Co. v. City Bank, 66 Minn. 441, 444, 69 N. W. 331; Hale v. Allinson, 188 U. S. 56, 23 Sup. Ct. Rep. 244.

The shareholders in an insolvent corporation may, under some circumstances, be deemed to be in the position of parties to an action in which it is a party and which involves the ascertainment of its obligations or the disposition of its rights of property. A judgment recovered or order made in such a proceeding may be binding upon them, when they can be considered as represented by the corporation in a matter in which it was its right and duty to speak in their behalf, even if its ability to defend their interests has been practically terminated by the appointment of a receiver. Fish v. Smith, 73 Conn. 377, 389, 47 Atl. 711. The Minnesota Thresher Manufacturing Company was a stranger to any contract raised by the Constitution of the State between its creditors and its shareholders. Whether any right of action had arisen out of that contract was, however, a question turning upon its financial condition. But if it could be held fully to represent any shareholder, though a citizen of another State, during the progress of the inquiry into its possession of assets, when it had been once ascertained both that it had none, and that he had discharged his entire obligation to it, it does not necessarily follow that it had an equal right to represent him for all purposes in any subsequent inquiry designed to fix upon him additional liabilities to other parties, and to liquidate their amount. Howarth v. Angle, 162 N. Y. 179, 47 L. R. A. 725, 56 N. E. 489. The courts of Minnesota have decided that it represents him fully in such proceedings in the matter of ascertaining the amount of the corporate debts and making the order of assessment for their payment. Hanson v. Davison, 73 Minn. 454, 462, 76 N. W. 254. Assuming for the purposes of this appeal that such is the law, the conelusiveness of such a finding or order rests ultimately on his consent, to he implied from the relation between corporation and shareholder. Holland v. Duluth I. M. & D. Co., 65 Minn. 324, 68 N. W. 50. This consent, springing from the shareholder’s original contract, cannot be extended by inference beyond the scope of that contract. Having agreed to answer for the debts of the Minnesota Thresher Manufacturing Company, the defendant may, as a party by representation, be conclusively bound by any order in the receivership proceedings whereby the amount of those debts is ascertained. Not 'having agreed to be responsible for a receiver’s expenses in all suits which he may bring to enforce the liability of any stockholder, it is not, as a party by representation, conclusively bound by an order in those proceedings whereby such future expenses are estimated and made the basis of an assessment against the shareholders.

The order of assessment by the Minnesota court, therefore, cannot be regarded by the courts of this State as having the conclusive effect claimed for it by the plaintiff under the Minnesota statute, when it is made the basis of an action against one of our citizens over whom no jurisdiction was acquired either by service of process within the State of Minnesota, or by a voluntary appearance. ' If the Act of 1899 can be construed as declaring that shareholders, not citizens of Minnesota, nor otherwise brought under the jurisdiction of its courts, are to be deemed to be parties to such an order, and conclusively bound by it in all respects, it would be much more than a change of remedy, and work so vital an alteration in their relations to the corporation and its creditors as to constitute an enlargement of their implied contractual obligations, which could not be forced upon them without their consent.

For the purposes of this appeal we assume (but do not decide) that the plaintiff is a proper representative of the creditors of the Minnesota Thresher Manufacturing Company; that he can maintain this action, as a statutory sue cessor to their contractual rights against the defendant,. upon its implied promise to satisfy those rights on the demand of such a successor to them ; and that these, under the terms of the defendant’s contract, could properly be worked out and defined by an order of assessment made by a Minnesota court, on a creditor’s bill, filed after the corporation had become wholly destitute of assets. But if all this be granted, the defendant still remains at liberty to assert in the present action that the assessment is for something which it never agreed to pay. No alteration of the laws of Minnesota affecting its moneyed corporations could substantially enlarge the contractual obligations of those who had previously become shareholders in them. It is to enforce these contractual obligations that the plaintiff sues. Hale v. Allinson, 188 U. S. 56, 79, 23 Sup. Ct. Rep. 244. They were not merged in the order of assessment. That was not a judgment against any one. The order does not profess to determine whether the defendant or any particular shareholder is liable to respond to the assessment made. A suit to collect it from any shareholder may therefore be met by any defense going to disprove his personal liability to the plaintiff upon his contract as a shareholder. Great Western Tel. Co. v. Purdy, 162 U. S. 329, 337, 16 Sup. Ct. Rep. 810; Bank of China v. Morse, 168 N. Y. 458, 61 N. E. 774. If a nonresident, and no party to the receivership proceedings unless as represented by the corporation, the defendant could also show that the order professes to charge him with an obligation to which he was not subject.

The validity of the order on which the present action is based has been affirmed by the Supreme Court of Minnesota, on an appeal by certain shareholders of the Minnesota Thresher Manufacturing Company who had intervened as parties in the receivership proceedings. The plaintiff has set up this adjudication in his complaint. It may be accepted as conclusive as to the true construction of the statute, in so far as concerns the meaning and intent of the legislature. It is not conclusive upon the defendant in this action, in so far as concerns their power by such a statute to add to its obligations under contracts previously made. That is a question not depending on the Constitution or laws of Minnesota, but on the general principles of the law of contract, guarded by the provision of the Constitution of the United States that no State shall deprive any person of property without due process of law. To increase a contractual obligation by mere legislative fiat would, if effectual, work a corresponding deprivation of property, without due process of law.

It is immaterial that the assessment laid was for much less than the full amount of the defendant’s double liability. It was not bound to pay anything on account of that liability except to satisfy corporate debts and the expenses incident to such action as the laws of Minnesota might provide for enforcing the obligations of shareholders to creditors whom the corporation left unpaid, and the costs of any subsequent suit properly brought for similar purposes against itself.

It does not appear how much of the 36 per cent, of the par value of their stock, which the shareholders were ordered to pay to the receiver, represented the amount of the company’s indebtedness, and how much represents the expenses of litigation either past or future. The assessment was an entirety. As it included “ a very considerable sum ” for part or all of which the defendant was not liable, its demurrer to the complaint should have been sustained.

By the answer, filed after the overruling of the demurrer, the plaintiff was put on proof of the Minnesota proceedings,. and any liability to him was denied.

The defendant, on the hearing, offered evidence to show the amount of the expense incurred by the receiver prior to the order of assessment, in conducting the examination necessary to advise the court as to how many of the shareholders were solvent; and since that order, in attempting to make collections from shareholders; and also what would be the total expense of collecting the whole assessment. This was excluded, and the exclusion is made a reason of appeal.

The questions were apparently intended to bring out facts from which the court might be enabled to ascertain the amount included in the assessment in excess of the corporate debts and the ordinary expenses of the receivership proceedings. No offer to waive the objection that the assessment was an entirety, and to submit to a judgment for the defendant’s share of whatever was properly assessed upon the shareholders having been made, the'evidence was irrelevant.

The record of the proceedings upon the creditor’s bill in the District Court for’Washington County in Minnesota showed that service was duly made upon the Minnesota Thresher Manufacturing Company on August 15th, 1901, of process summoning it to appear and make answer to thé bill within twenty days after such service; that on August 16 th, 1901, the plaintiff moved for the appointment of a receiver, due notice of which motion was served on the defendant and upon S. Blair McBeath its attorney; that the plaintiff and defendant each duly appeared by attorney and were heard on the motion; and that thereupon a receiver was appointed on that day.

Evidence was properly excluded by the Superior Court which was offered to show that the appearance in the receivership proceedings entered for the Minnesota Thresher Manufacturing Company by S. Blair McBeath, as its attorney, was unauthorized by that company. The corporation was a citizen of Minnesota, and the faith and credit due to the record of the District Court forbade any impeachment of the statement therein contained; that it appeared to defend and was duly heard.

Exceptions were filed to the refusal of the Superior Court to alter its finding in certain points as requested by the defendant. The extracts from the record of the receivership proceedings in the District Court on which these exceptions are based, contain nothing inconsistent with the finding of the Superior Court, or leading to any other conclusions of fact than those to which it came.

There is error, and the cause is remanded to be proceeded with according to law.

In this opinion Hall and Prentice, Js., concurred.