Evans v. Nellis

101 F. 920, 1900 U.S. App. LEXIS 5191

• Court: U.S. Circuit Court for the District of Northern New York
• Decided: May 23, 1900
• Status: Published

Opinion

COXE, District Judge.

The Interstate Loan & Trust Company was organized in 1885. The defendant became a stockholder in 1889. The first judgment was recovered against the company in 1896 on which $2,000 is still due. The second judgment was recovered in 1897 and execution was returned unsatisfied in January, 1898. The plaintiff was appointed receiver of the company in June, 1898. During this time and until January, 1899, when the act giving the receiver a right to recover the additional liability of stockholders was passed, the General 'Statutes of 1868 of Kansas were in force. In order to ascertain the effect of the subsequent legislation it is necessary to understand what were the rights of the parties when that legislation took effect. Section 32 of the statutes of 1868 provided that if an execution were returned nulla bona against a corporation an execution might issue by order of the court against any of the stockholders to an extent equal in amount to the amount of stock owned by him, or the plaintiff in the execution might proceed by action to charge the stockholders with the amount of his judgment. On the 6th of January, 1898, therefore, the plaintiffs in the Crissey and Streeter suits had a right of action against the defendant, but only for the amount of their judgments. Any defense by way of counterclaim or set-off which the defendant had against 'Crissey or Streeter was available to him in such action. By section 44 he was given an action of contribution against the other stockholders, so that had he been required to pay the Crissey and Streeter judgments he could have compelled the other stockholders to pay their proportionate shares.

In the recent decision of Whitman v. Bank, 176 U. S. 559, 20 Sup. Ct. 477, Adv. S. U. S. 477, 44 L. Ed. -, the supreme court has settled most of the vexed questions regarding the organic and statute law of Kansas as it existed prior to the amendments of 1899. The following propositions may he deemed decided:

First. The words of the Kansas constitution providing that “dues from corporations shall be secured by individual liability” are not merely directory ■ to the legislature hut of themselves declare the stockholders’ liability and to this extent are self-executing.

Second. The constitution and the statutes must he taken together as forming one body of law, the statutes prescribing the mode of enforcing the constitutional liability. “Whatever else may be said about the remedy it is direct, certain and available to every creditor of a corporation, and leaves to the stockholders the adjustment between themselves of their respective individual shares of the corporate obligations.”

Third. The liability of the. stockholder, though statutory in its origin, is contractual in its nature. In other words, each of the stockholders entered into a contract, authorized by statute, with each other-and . with , the creditors of the corporation that debts established by judgment against the corporation might be collected of them to an amount equal to the amount of their stock provided there was no corporate property upon which to levy. They also agreed that one stockholder paying such judgment might have contribution from all the others.

Applying the law of the Whitman Case directly to the facts now before the court, it will be seen that the defendant was only under obligation to pay the Crissey and Streeter judgments and such other debts as were reduced to judgment. If he had a defense against any of these judgment creditors he could assert it. If he were re-, quired to pay he could himself compel other stockholders to contribute. Having paid all judgment creditors his obligation ceased. Hoyt v. Bunker, 50 Kan. 574, 32 Pac. 126. On the other hand Crissey and 'Streeter were vested with certain important and valuable rights under ■ the contract between them and the stockholders. They as individuals could enforce their judgments against any stockholder wherever found. They were not called upon to share the amount so recovered with simple contract creditors or to pay any part thereof to a receiver or as costs and fees of the officers of the court. If one of these judgment creditors were the first to sue a solvent stockholder whose liability was equal to the amount of the judgment his debt was safe. This, then, was the situation when the law of 1899 went into operation. The new law wrought a sweeping and radical change. New liabilities are created and new remedies are provided. Section 23, as amended, provides for the appointment of a receiver upon an execution being returned nulla bona. The receiver so appointed shall close up the affairs of such corporation and shall immediately institute proceedings against all the stockholders to collect unpaid subscriptions and the additional liability. The money thus collected shall be held for the benefit of all the creditors and shall be used under the direction of the court to pay the costs and expenses of-the receivership and all claims against such corporation. Any judgment obtained by the receiver against a stockholder who has not paid the amount due from him may be assigned to the stockholders who have paid and enforced by them against the delinquent stockholder for his proportionate amount. Section 46, as amended, provides that the stockholders shall be liable to the creditors for unpaid subscriptions and in addition thereto for an amount equal to the par value of the stock owned by them, such liability to be an asset of the corporation to be collected by a receiver for the benefit of all the creditors. Under the former law the stockholder’s additional liability was an obligation to pay the judgment creditor who was unable to collect his debt from the corporation. Under the present law this liability is-an asset of the corporation for the benefit of all the creditors. Under the former law the right to collect his judgment rested with the judgment creditor. He could act immediately. Nothing but his own laches could impair this right. Under the latter law the judgment creditor has no advantage over the most negligent and supine contract creditor. All alike must trust fo the discretion of the receiver; if he fails in duty the debt of the judgment creditor is lost. In the one case the entire indebtedness of the stockholder was applied without diminution upon the judgment. In the other case the entire amount collected may by order of the court be devoted to the payment of the receiver’s commissions, costs and expenses. Under the former law the stockholder could avail himself of any defense, counterclaim or set-off he might have against the pursuing creditor. These defenses no longer exist. Under the former law, when he had paid the judgment creditors the liability of the stockholder ended; now he must pay the entire amount to the receiver even though it be twice the amount necessary to pay the corporation’s debts. Whether any of the balance be returned or not depends largely upon the economy, prudence and honesty of the receiver. In short, the new law destroys, absolutely, all rights which the judgment creditor, qua a judgment creditor, possessed; takes away all right of independent action and compels him to share pro rata with all the creditors. As to the stockholder, it deprives him of defenses which would defeat the former action, compels a full payment when a partial payment was oftentimes sufficient and devotes the ainount recovered to the payment of obligations not mentioned in the former statute. It is not difficult to suppose a case where a stockholder absolutely safe from pursuit under the former act may be financially ruined under the present act. For instance, where a stockholder was sued for, say $10,000, by the only judgment creditor. If the judgment creditor owed the stockholder the sum of $10,000 it is manifest that he could not recover. Or, assume a situation where the entire amount recovered is consumed in paying the expenses of the receivership.- In the first of these instances the receiver fakes money which could not be collected under the former act; in the second, he applies the money collected to the payment of obligations which are created for the first time by the act of 1899, and which are not “dues from corporations.” Ward v. Joslin (C. C.) 100 Fed. 676. It is true that under the prior statute in certain circumstances an equal amount might be recovered, but the stockholder might discharge his entire obligation by paying much less than the full amount. Under the present law his liability is increased by compelling him to pay the full amount and by applying it in payment of an entirely new class of obligations.

Since the trial of this action the supreme court of Kansas, in the case of Woodworth v. Bowles, 60 Pac. 331, has declared unconstitutional similar provisions of the Kansas statute relating to the liability of stockholders in banks. Section 55 of chapter 47 of the act of 1897, provides that the receiver shall, after the expiration of one year, institute the proper proceedings in the name of the bank for the collection of the liability of the stockholders to be distributed pro rata among the creditors. No action by creditors against stockholders shall be maintained unless it shall appear to the satisfaction of the court that the receiver has failed to begin the action as required by law. The court held that if the statute were given a retroactive • construction it was invalid because it deprived creditors of their right to maintain proceedings against the stockholders or, at least, postponed that right for a year. The court says:

“The act of 1897 does not assume to abrogate the contract or relieve the stockholder from liability, but'it does assume to do two other things: First, to suspend for one year the pursuit by the creditor of the special remedy afforded by the laws in existence at the time of the making of the contract; and, second, to deprive the creditor of such remedy altogether if the receiver at the end of the year should institute an action for him and for the other creditors, in which last-mentioned case the fund collected by the receiver is to be distributed pro .rata between all the creditors. * * * If, however, the new enactment, although not designed to effect the substantial right, does nevertheless embarrass or substantially delay the creditor in the collection of the debt, it will be held to have impaired the obligation of the contract. We deem section 55 of the law of 1897, in its application to existing contracts between creditors and stockholders, to be an enactment of the latter kind. * * * If the receiver should institute an action and collect the liability, even though every stockholder should be solvent and should discharge his liability in full, the creditor might, nevertheless, not receive full payment of his claim. He must share with other creditors. * * * Vigilance and diligence on the part of a creditor in the pursuit of one or the other of his remedies in one or another of the contingencies stated, might avail to secure the payment of his claim in full. Under the statute as it now exists, vigilance and diligence may avail nothing.”

It is thought that the logic of this opinion when applied, in similar circumstances, to the law of 1899 in its retroactive aspect, must result in a similar judgment. In Bronson v. Kinzie, 1 How. 311, 11 L. Ed. 143, the supreme court decided that where a mortgage contained a power to the mortgagee to sell on breach and thereby pay the debt, a subsequent law giving the, mortgagor 12 months to redeem and prohibiting the property from being sold for less than two-thirds its appraised value, so altered the remedy as to impair the obligation of the contract. Barnitz v. Beverly, 163 U. S. 118, 16 Sup. Ct. 1042, 41 L. Ed. 93. It is true that a law will not ordinarily be declared unconstitutional on the objection of one whose interests are not injuriously affected by the objectionable features. If the accusations against the act in question were only those which might be presented by the judgment creditors, whose rights have manifestly been invaded, there might be more difficulty in declaring it invalid. There are, however, exceptions to "the general rule which are stated by Judge Cooley to be found in cases “where it is evident, from a contemplation of the statute and of the purpose to be accomplished by it, that it would not have been passed at all, except as an entirety, and that the general purpose of the legislature will be defeated if it shall be held valid as to some cases and void as to others.” Cooley, Const. Lim. (4th Ed.) 219. It would, indeed, be a strange anomaly if the statute in question were held valid when attacked by stockholders and invalid when attacked by judgment creditors. Such a construction would lead to endless confusion and injustice. But, as has been seen, the contractual rights of the stockholders have been impaired equally with those of the judgment creditors. It is undoubtedly true that whatever belongs merely to the remedy may be changed as the legislature may direct, but the court cannot believe that this familiar rule is applicable to a law which makes such fundamental changes in the terms of the contract.

The case of Hill v. Insurance Co., 134 U. S. 515, 10 Sup. Ct. 589, 33 L. Ed. 994, is relied on by the plaintiff. The point decided is well stated in the syllabus:

“A state statute which confers upon a judgment creditor of a corporation, when execution on a judgment against the corporation is returned unsatisfied, the power to summon in a stockholder who has not fully paid the subscription of his stock, and obtain judgment and execution against him for the amount so unpaid, in no way increases the liability of the stockholder to pay that amount; and, inasmuch as he was before then liable to an action at law by the corporation to recover from him sucli unpaid amount at law, as well as to a suit in equity, in common with other similar stockholders, to compel contribution for the benefit of creditors, no substantial right of the stockholder is violated.”’

It is manifest that the case involved merely a change of remedy. The defendant was liable at law to pay the amount of his subscription for which he had given his notes to the company. Then came the law permitting a judgment creditor to collect ihe amount due but changing in no way the extent of the liability. The court says:

“His undertaking was to pay each and all of his notes on demand, and it was entirely competent for the legislature, as a regulation of the business and affairs of the company, to give its creditors a new or additional remedy by which tiffs undertaking could be enforced in their behalf — such remedy ■not increasing the debtor’s liability.”

That the liability of the defendant has been increased is pointedly illustrated by the fact that whereas under the pre-existing statute the recovery could be for the sum of $16,000 only, the original complaint demands judgment in the sum of $60,200, and there is no doubt that the existing law permits such a recovery. The injustice of such a situation is impliedly conceded by the plaintiff who at the trial voluntarily consented to limit the amount of the recovery to $16,000. In the brief the plaintiff’s counsel asks the question:

“What difference does it make to the defendant whether he pays §16,000 to the plaintiff' or to the individual creditors of the Interstate Loan & Trust Company?”

The answer is:

None, but it makes a difference of §44,200 whether judgment is entered under the old law or under the new, and tills is the proper test to a.pply when considering the question of the defendant's liability.

The plaintiff, admitting that certain parts of the act, if given a retroactive effect, may be decided to be unconstitutional, contends in the brief as follows:

“The act of January 11, 1890, authorizes a recovery against the defendant to tile amount of §60,200. We ask a recovery in this case of about §10,000. Conceding, for the sake of the argument that the statute is unconstitutional in so far as it authorizes a recovery to the full amount of the liability of the defendant, is there any valid reason why the §16,000 that is constitutional cannot be separated from the §60,200 which is unconstitutional, will not the intent of the legislature be carried out thereby?”

The difficulty with this reasoning, as it seems to the court, is that it assumes that there is some provision of the act of 1899 which authorizes a recovery of $16,000. Where is the provision? All former provisions limiting the recovery to the amount of the judgments have by this act been swept away. There is no alternative provision for an action at law in favor of the judgment creditors or by the receiver to recover the amount of their judgments. The provision seems to be mandatory. “The receiver shall immediately institute proceedings against all stockholders to collect * * * tire additional liability of suck stockholders equal to the par value of the stock held by each.” The suit is brought under this section of the law and if the law falls the suit falls with it. There is no other provision authorizing an action at law in favor of the receiver for the amount . of the judgments. The concessions of the receiver cannot affect the qu'estion of the constitutionality of the law. A plaintiff suing under a void law cannot make it valid by agreeing to receive one-fourth of the amount demanded. If the law, as a retroactive measure, be clearly invalid, and the defendant insists upon the point, it is not easy to see how the court can avoid pronouncing the judgment of inyalidity because the plaintiff consents to make the recovery no more onerous than it would have been under a former statute which has been repealed.

It follows, therefore, that the law in question impairs the obligation of the defendant’s contract if construed to act retroactively and, to that extent, is invalid. The complaint is dismissed.