Globe Publishing Co. v. State Bank

59 N.W. 683, 41 Neb. 175, 1894 Neb. LEXIS 143

• Court: Nebraska Supreme Court
• Decided: June 6, 1894
• Docket: No. 5538
• Status: Published

Opinion

Ragan, 0.

Tbe State Bank of Nebraska at Crete, Nebraska, sued tbe Globe Publishing Company and the stockholders thereof in the district court of Saline county to recover the amount of a promissory note owing by said Globe Publishing Company to the said State Bank. Both the bank and the Globe Publishing Company were domestic corporations, having their principal places of business in said Saline county. The bank had judgment, and the Globe Publishing Company and all stockholders, except two, bring the case here for review.

The liability of the stockholders of the publishing company for the debt due from it to the bank was based on the failure of the publishing company to publish an annual notice of its existing debts, as provided by section 136, chapter 11, General Statutes, 1873, in force at the titne the debt sued for here was contracted. That section is as follows : “ Every corporation hereafter created shall give notice annually in some newspaper printed in the county or counties in which the business is transacted, and in case there is no newspaper printed therein, then in the nearest paper in the state, of the amount of all the existing debts of the corporation, which notice shall be signed by the president and. a majority of the directors; and, if any-corporation .shall fail to do so, all the stockholders of the corporation shall be jointly and severally liable for all debts of the corporation then existing, and for all that shall be contracted before such notice is given.” After this suit was brought, but before judgment Was rendered therein, the legislature repealed this section 136 without á saving clause. The argument of counsel for plaintiffs in error now is that the repeal of said section abated this action. Whether this is true depends upon the nature of the statute' repealed. If it was a statute- contractual in its nature; if the right of action acquired by the bank against the stockholders of the publishing company by virtue of said statute, and the corporation’s violation thereof, was a vested right, then the repeal of the statute could not and did not take it away; but if the statute repealed was penal in its nature, then its repeal abated the action.

1. A suit pending to enforce a right or remedy conferred solely by statute is abated by the unconditional repeal of such statute, before judgment rendered in such suit. (Bennet v. Hargus, 1 Neb., 419; Knox v. Baldwin, 80 N. Y., 610; Victory Webb Printing & Folding Machine Mfg. Co. v. Beecher, 97 N. Y., 651; Gregory v. German Bank of Denver, 3 Col., 332; Breitung v. Lindauer, 37 Mich., 217; Yeaton v. United States, 5 Cranch [U. S.], 281; Norris v. Crocker, 13 How. [U. S.], 429.)

2. Was this a penal statute? This question must be answered by the authorities. In 1848 the legislature of New York enacted a statute governing manufacturing corporations (ch. 40). Section 12 of that act was as follows: “Every such company shall annually, within twenty days from the first day of January, make a report, which shall be published in some newspaper published in the town, city, or village, or if there be no newspaper published in said town, city, or village, then in some newspaper published nearest the place where the business of said company is carried on, which shall state the amount of capital and of the portion actually paid in and the amount of its existing debts, which report shall be signed by the president and a majority of the trustees and shall • be verified by the oath of the' president or secretary of said company and filed in the office of the clerk of the county where the business of the company shall be carried on; and if any of said company shall fail so to do, all the trustees of the company shall be jointly and severally liable for all the debts of the company then existing and for all that shall be contracted before such report shall be made.’.’ A New York corporation organized under this law failed to give the annual notice of its indebtedness as provided by said section 12, and during such default became indebted to a bank. The bank then sued the trustees of the corporation for the amount of the debt. The court of appeals of New York in Merchants Bank of New Haven v. Bliss, 35 N. Y., 412, discussing said section 12 and another section, said: “The liability (of the trustees under said section 12), it must be observed, is not limited to the injury or damage sustained by the creditors in consequence of the violation, but upon failure to file the report, * * * the trustees are subjected to the payment of the whole amount of the debts of the company then existing and for all that shall be contracted. * * * These provisions appear to be severally punitive, inflicted on grounds of public policy for the protection of creditors and the prevention of frauds upon the public in respect to the financial condition of such corporations. It is clear that the liability of the trustees is not imposed as an indemnity, because it has no relation to the actual loss or injury sustained by the party in whose favor the action is given. The action depends wholly upon the statute. There never was any such remedy or cause of action in whole or in part at common law. If any action could have been maintained at common law for either of the causes mentioned in sections 12 and 13 of the general act in relation to manufacturing corporations, it could extend only to the actual damages or injury sustained. But those elements have nothing to do with the actions given by these sections, nor, indeed, is it necessary that the creditor should have sustained any injury or damage by reason of a violation of those sections. It is sufficient that the party prosecuting the action should be a creditor when the violation of the law takes place. The right of action is given to the creditors and they must be held to be the parties aggrieved. For these reasons I am satisfied that the sections 12 and 13 imposea penalty,” etc. The question of the nature of this section 12 arose again and was discussed and decided by the court of appeals of New York in Miller v. White, 50 N. Y., 137, and the court said: “ It will be perceived that this is a highly penal act, extremely rigorous in its provisions.” In Wiles v. Suydam, 64 N. Y., 173, the statute was again before the New York court of appeals. In that case the Imperishable Stone Block Pavement Company, a domestic corporation, became indebted to Wiles and others. Suydam was ■a stockholder in the corporation and indebted to it on his stock subscriptions. He was also a trustee of the corporation. The suit was brought by Wiles and others against Suydam to recover the amount of the debt owing them by the pavement company; and Wiles set out in his petition against Suydam two causes of action, viz., his indebtedness on his stock subscription to the Stone Pavement Company, and the failure of that corporation to publish annually the statement of its existing debts. The court held that the indebtedness of Suydam on his unpaid subscription constituted one cause of action against Suydam, and in discussing the other right of action of Wiles against Suydam originating by the failure of the corporation to publish its annual statement said: “ The allegations against the defendant as trustee also constitute a distinct and perfect ■cause of action. * * * Here the liability is created by statute, and is in the nature of a penalty imposed for neglect of duty in not filing a report showing the situation of the company.” The nature of this section 12 has been before the New York court of appeals and the construction placed upon said section in the leading case, Merchants Bank of New Haven v. Bliss, 35 N. Y., 412, and reaffirmed in the following cases: Easterly v. Barber, 65 N. Y., 252; Knox v. Baldwin, 80 N. Y., 610; Veeder v. Baker, 83 N. Y., 156; Pier v. Nanmore, 86 N. Y., 95; Stokes v. Stickney, 96 N. Y., 323; Victory Webb Printing & Folding Machine Mfg. Co. v. Beecher, 97 N. Y., 651. And in Gadsden v. Woodward, 103 N. Y., 242, the nature of said section 12 w$s again before the New York court of appeals, and the court said: “ This action is brought against the defendant to recover a debt due by a manufacturing corporation of which he was a trustee, and he is sought to be made liable therefor on the ground that he failed to make the annual report required by the general manufacturing law. The, action is not to recover a debt which he owes, but to impose upon him, as a penalty for his default, the payment of. the debt of the corporation. We have repeatedly held that such an action is an action for a penalty or forfeiture. *■ * * The liability sought to be enforced against the defendant does not arise out of any contract obligation, but is imposed by the statute as a penalty for disobedience of ¡its requirement.” This section 12 of the New York law was construed by the supreme court of the 'United States in Chase v. Curtis, 113 U. S., 452, the court saying of said section 12: “But, as we have already seen, the statute involved in this discussion is not a remedial statute to be broadly and liberally construed, but is a penal statute, ■with provisions of a highly rigorous nature, to be construed most favorably for those sought to be charged under it, and with strictness against their alleged liability.”

Section 15 of chapter 18 of the Revised Statutes of 1868 of the state of Colorado is a copy of section 12 of the New York act. The nature of this section 15 of the Colorado act was before the supreme court of that state in Gregory v. German Bank of Denver, 3 Col., 332, and of that statute that court said:- “This statute is in its nature penal. It prescribes a determinate penalty for neglect of a duty imposed by law upon the trustees of companies organized under our general incorporation act. The amount of the forfeiture is measured by the aggregate debt contracted by the company. The liability is not founded upon “con tract, but arises from misconduct in office.” This case was reaffirmed by the supreme court of Colorado in Larsen v. James, 29 Pac. Rep. [Col.], 183. A statute of Michigan required annual reports of certain corporations to be filed, and provided that if the directors neglected to file such report they should be liable for all the debts of the corporation contracted during the period of such neglect. Construing that statute the supreme court of that state held that the liability imposed was in the nature of a penalty and conferred no contract obligation upon which creditors could rely.

A statute of Connecticut provided that in the case of every corporation, certificates showing their condition should be filed annually by the president and secretary with the town clerk, and that in case of neglect those officers should be liable for all the debts of the corporation contracted during the period of such neglect. The supreme court of that state, construing this statute in Mitchell v. Hotchkiss, 48 Conn., 9, said: “We do not see how it is possible to construe this statute as creating, or attempting to create, any contract relation or duty between the creditors of a corporation and its president. The adoption of such a construction would suggest grave doubts as to the validity of the act which should attempt so arbitrarily to make a debtor out of a stranger to the debt, or, in other words, to • make the debt of one person the debt of another. There was no privy between Hotchkiss and the plaintiffs. They had no transaction with each other, and the former owed the latter no private duty from which a promise might be implied.” This Connecticut statute came before the supreme court of the United States, and its nature was construed by that court in Steam Engine Co. v. Hubbard, 101 U. S., 188, and that court held that the Connecticut statute was penal and must be strictly construed.

The supreme court of Illinois in Diversey v. Smith, 103 Ill., 378, defines a penal statute thus: “A penal statute is an act by which a forfeiture is imposed for transgressing the provisions of the act. It may also be remedial in one part and penal in another. The effect and not the form of the statute is to be considered, and if its object is clearly to inflict a punishment on a party for doing what is prohibited or failing to do what is commanded to be done, it is penal in its character.”

Cook, Stock & Stockholders [2d ed.], sec. 223, in discussing the enforcement of the statutory liability of stockholders in the courts of a state other than the one in which said corporation was created, uses this language: “In general, when the courts of one state are asked to enforce the statutory liability of stockholders in a corporation created by another state, two things are to be considered: First —Is the statutory liability itself a contract liability or a mere penalty ? * * * The law is clear that the courts of one state will not enforce penalties imposed by another state. But the usual statutory liability of stockholders is not a penalty. * * * The ordinary statutory liability of stockholders is a contract liability and will be enforced as such by the courts of all the states. A different rule prevails as to the statutory liability of corporate officers for failure to file reports or give certain notices or make certain contracts. Such liability is generally construed to be penal, and will not be enforced by the courts of other states.”

The section of the Nebraska statute under consideration is almost a literal copy of the eighteenth section of the first article of the corporation act of the state of Missouri, approved March 19, 1845, the section of the Missouri law being in the following words: “Every corporation hereafter created shall give notice annually in some newspaper printed in the county where the corporation is established, and in case no paper is printed therein, then in the nearest paper, the amount of all the existing debts of the corporation, which notice shall be signed by the president and a majority of the directors; and if any of the said corporations shall fail so to do, all the stockholders of the corporation shall be jointly and severally liable for all the debts of the company then existing, and for all that shall be contracted before such notice shall be given.” A corporation of that state having failed to publish an annual notice of its existing debts, and during such default having become indebted, an action was brought against all the stockholders of the corporation for the debt so contracted, on the ground of the default in publishing the annual notice required by the section just quoted. The right of the creditor to maintain the action against the stockholders depended upon whether the statute was in its nature penal, and the supreme court of the state of Missouri in Cable v. McCune, 26 Mo., 371, decided that the statute in question was a penal one. The court said: “Our opinion in this case is based entirely upon the penal character of the statute we are called upon to construe. The corporation is required to publish an annual statement of their condition for the information of the public, and the failure to do so renders the stockholders responsible for a specified class of demands existing prior to or at the time of such publication. * * * This liability, in .the event of there being no required publication, does not depend upon the actual injury which the failure to publish may have occasioned in a given case, but is absolute, dependent only on the proof of publication or no publication. Such a statute can be regarded in no other light than a penal one.”

Thus far we have been reviewing authorities which show that the Nebraska statute under consideration, and statutes like it, is a penal one. We now direct our attention to the argument of counsel for the defendant in error, and the authorities cited by them, that section 136 of the Nebraska statute is in its nature contractual. In other words, that the right of action given thereby to the creditors of a corporation against its stockholders for the failure of the corporation to publish the annual statement of its indebtedness is a right of action arising by contract and therefore a vested right and one that the legislature could not take away by repealing the statute. It is contended that as section 136 was in forcé at the time of the organization of the Globe Publishing Company it became a part of fits charter, and that the stockholders thereof, by virtue of such statute and the organization of such corporation while it was in force, impliedly contracted and promised that in case the corporation failed to publish its annual statement, they, the stockholders, would pay all the ddbts that the ■ corporation contracted during the period of such default. But counsel lose sight of the distinction between the liability of a member of a voluntary unincorporated association for the debts thereof as it existed at common law and as fixed by statutes declaratory thereof, and the statutory liability of a stockholder of a corporation de jure. When the law prescribes what the liability of a shareholder shall be, for instance, that such shareholder shall be liable to the creditors of the corporation for double the amount of his stock, or for a sum equal to the amount of his stock, or- for the amount remaining unpaid on his subscription to the stock of such company, the law is then speaking of and fixing the liability of a stockholder in a corporation de jure, as, without an express statute, a stockholder in such a corporation would not be liable for any debt whatsoever of such corporation; and when a statute so prescribes and fixes the amount for which the stockholders in a corporation shall be liable, such a law is intended to be a limitation upon the stockholder’s exemption from liability for the debts of the corporation which he would otherwise enjoy; and persons who organize themselves into a de jure corporation, when such a statute is in force, incorporate it into, and it becomes a part of, their charter, and they impliedly agree and assent that their liability for the debts of the corporation shall be as fixed by such a law. Where a statute provides that until certain things are done by persons forming a corporation, such as the filing of its articles of association in the office of a public officer, the stockholders in such corporation shall be liable for the debts thereof, such a statute is only declaratory of the common law. Until the requirements of the statute have been complied with, a de jure corporation would not exist, and the parties thereof would be jointly and severally liable for all the debts contracted by such voluntary unincorporated association of persons. At least, since the time our Norse áticestors settled on the shores of the Baltic sea, it has been the law that where two or more persons engaged in a common enterprise, each one was liable for the act of the others and for the debts incurred by the others in aid of the common object for which the association was formed or the enterprise undertaken. It is evident that the statute, which makes all the stockholders of a corporation liable for the debts thereof until the requirements of the statute have been complied with necessary to make such a corporation one de jure, cannot be considered a penal statute, as such statute adds nothing to the liability of such parties, nor takes away any right which a. creditor of such parties might have had; but where the law commands corporations to: do certain acts, as to publish annually a notice of their indebtedness, such a law is addressing itself, not to de facto corporations or copartnerships or unincorporated associations, but to corporations de jure and the stockholders of such corporations; and when such a statute declares that all the stockholders of such a corporation shall be liable for all the debts of the corporation, if it fails to comply with the requirements of the statute, then such a law is designed as a punishment of the stockholders, and is penal.

Among the authorities relied upon by the eminent counsel for the defendant in error to sustain their argument that the section of the Nebraska statute under consideration was •contractual in its nature is the case of Hawthorn v. Calef, 2 Wall. [U. S.], 10. An examination of that case, how-' ever, discloses that it does not by any means sustain' the •contention of counsel. A statute of Maine passed in;,1836 provided that the shares of the individual stockholders of a corporation should be liable for the debts of the corporation, and in case of deficiency of attachable corporate property or estate, the individual property rights and credits of the stockholder should be liable for the corporation’s debts to the amount of the stockholder’s stock. A corporation organized under this law became indebted, and soon after the debt was contracted the legislature of the state repealed the law making the stockholder of a corporation individually liable to a creditor thereof. The creditor, however, sued the stockholder, alleging that the statute referred to was contractual in its nature; that the right of action he had acquired against the stockholder was a vested right, and that it was not within the power of the legislature of Maine to take that right away by repealing the statute. This contention the supreme court of the United States sustained in the case just cited. Another case relied on by counsel to support this argument is Flash v. Conn, 109 U. S., 371. The tenth section of the corporation law of the state of New York provided that all the stockholders of every company incorporated under the act should be severally and individually liable to the creditors of the corporation to an amount equal to the amount of stock held by them in such corporation. A corporation having become indebted, the creditors sued its stockholders for the debt under the section just quoted, and the supreme court of the United States, in construing said section 10, held that the liability created thereby was contractual in its nature. With the doctrine announced by the two cases last-cited we entirely agree. The statute of the state of Maine which fixed the liability of a stockholder of a corporation for the debts thereof at the amount of the stock held by him in such corporation was contractual, and whoever became a stockholder in a corporation while that law was in force impliedly assented and agreed that he would be liable for the debts of the corporation to an amount equal to the stock held by him therein. It was a fixed, ascertained, and determined liability at the time he became a member of the corporation. It was a law addressing itself to stockholders of de jure corporations; and a law of limitation upon the exemptions that such stockholders would have otherwise enjoyed but for such statute; and the same may be said of section 10 of the New York law construed by the supreme court in Flash v. Conn. But it is said that this court is committed to the doctrine of the contractual nature of the statute under consideration; and to sustain this contention we are cited to Abbott v. Omaha Smelting & Refining Co., 4 Neb., 416, and White v. Blum, 4 Neb., 555; but these cases decide, and decide only, that where persons have attempted to form a corporation, until they shall have complied with the requirements of the statute for that purpose, are jointly and severally liable for the debts of such association. This conclusion is right and we adhere to it; but the conclusion reached in these cases resulted not alone from the statute, but could and would have been the same had no statute on the subject existed. Until the statute had been complied with the Omaha Smelting Company and the Midland Pacific Railroad Company did not become corporations de jure; and until they had become such .corporations, the parties organizing them were simply members of voluntary unincorporated associations, and as such were liable both at common law and under the statute for the debts of such associations, contracted by any member thereof within the scope of his authority and for the purposes for which the associations existed. But we do not mean by anything said here to deny the correctness of the doctrine, expressed in many cases, that where persons attempt in good faith to incorporate themselves into a valid corporation, and in such corporations named actually e it ter upon the discharge of corporate functions, and so continue for a considerable time unchallenged by the state, that persons who contract with such corporation cannot hold the stockholders thereof liable on such contract, because it transpires that, by some mistake or oversight, the corporation had never become a technical de jure corporation. On the contrary, we approve of that rule.

It is conceded by counsel for defendant in error that section 12 of the New York act construed in the cases cited above was and is penal, but it is said that, as that act made the trustees of the corporation liable for not publishing the notice of the corporation’s existing debts, a distinction exists between the nature of that act and section 136 of the Nebraska act, wherein the liability is made to attach to all the stockholders of the corporation. We have reflected much upon this argument and confess our inability to comprehend the distinction which counsel would draw. We have been unable after a patient search to find any decided case or any text-writer supporting the counsel’s argument. It may be that .the directors of a corporation would be liable for fraud or deceit practiced by them in the name of the corporation upon another, and it may be that they would be liable for any damage which another should sustain in dealing with such corporation by the failure of such directors to comply with the law in force governing the corporation! but if such liability exists, it is not a statutory liability, but a common law liability; and in either of the cases supposed the liability of the directors would be measured by the damages sustained. If section 12 of the New York act is penal because it compels the directors to pay the debts of the corporation because they, its managing officers, did not comply with the requirements of the law, it would seem that a statute which makes all the stockholders of a corporation liable for the default of the corporation’s directors would also be penal. If the section of the Nebraska statute under consideration is not a penal one, we are at a loss to .know how the legislature could frame a penal statute. It certainly is not a statute of rewards. True, thepunishment inflicted is pecuniary, but by the provisions of this' statute a stockholder who owns $10 of stock in a corpora-. tion may, under certain contingencies, be compelled to pay a debt of $10,000 that he did not owe, that he did not contract, and suffer that liability because of the default of another. True enough the object of the statute was to annually notify to the world the financial condition of the domestic corporations of the state, that parties having transactions with them might have a basis upon which to do their business safely; but this is not the only object of the statute. It is the exercise by the state of its police power. It is based upon principles of public policy, and it was intended as an incentive to stockholders of corporations to see to it that the law of the state was obeyed; and if they neglected their duty in that regard, to punish them for such neglect. We cannot recognize the argument that persons were induced to give the corporations of the state credit because of the existence of this section 136, for this would be to concede that the creditors parted with their property upon the understanding that when they did so that the officers of the corporation would violate the law which it was their duty to obey.

But, again, counsel for defendant in error say that the nature of the statute under consideration is no longer an open question in this court, as we have decided that the statute was not penal but contractual. In Howell v. Roberts, 29 Neb., 483, and again in Coy v. Jones, 30 Neb., 798, we did so decide. A somewhat extensive re-examination of the subject, however, constrains us to say that the conclusion reached by us in those cases was wrong and they must be overruled. We did say in those cases that said section 136 of the Nebraska statute was contractual in its nature. We were mistaken. The rule we announced in those cases is not supported by the weight of authority, nor indeed is it supported by any authority that we have been able to find. We conclude, therefore, that said section 136 was a penal statute, and that all rights of action which accrued thereunder to the creditors of a corporation against the stockholders thereof and which had not been reduced to judgment were abrogated by the repeal of said section.

This suit was brought against the Globe Publishing Company and the stockholders thereof jointly. Was the action against the stockholders prematurely brought? We think it was. Cook, Stock & Stockholders, sec. 219, thus lays down the rule: “ Even when not expressly provided by statute, it is the rule, according to the weight of authority, that corporate creditors, before they can proceed against the shareholders upon their statutory liability, must first exhaust their remedy against the corporation and its assets.” We have no doubt but this is the general rule and the better practice, especially in the absence of a statute which authorizes a different procedure; but we are not concerned with what the rule may be in other states and courts. Section 4, article 11, of the constitution provides that “In all cases of claims against corporations and joint stock associations, the exact amount justly due shall be first ascertained, and after the corporate property shall have been exhausted, the original subscribers thereof shall be individually liable to the extent of their unpaid subscription, and the liability for the unpaid subscription shall follow the stock.” The word “ ascertained ” in this provision we take to mean “judicially ascertained; ” and to “judicially ascertain ” the amount due from a corporation to a creditor means to have the finding and judgment or decree of a court as to such amount. Such an ascertainment of a debt due from a corporation could then be ascertained, and ascertained only, within the meaning of this constitution, in a suit brought by a creditor of a corporation against it; not against the stockholders thereof, nor against the stockholders and corporation jointly. The expression in the constitutional provision just quoted above, “that after the corporate property shall have been exhausted,” means exhausted by judicial proceedings; that is, when executions issued on judgment ■ or decrees rendered against corporations shall be returned. unsatisfied. This constitutional provision is the supreme law of the land, and we are not at liberty, nor desirous, of evading it or construing it away. We think, therefore, that the creditors of a de jure corporation have no light of action against the stockholders thereof until they have reduced their claims against the corporation to judgment, and until an execution issued upon such judgment has been returned wholly or in part unsatisfied. It follows from this that a creditor’s cause of action against the stockholders of a corporation under said section 136 would not accrue until such creditor had sued the corporation for the corporate debt, obtained a judgment thereon, and an execution issued on such judgment had been returned, at least in part, unsatisfied. The judgment of the district court is affirmed as to tlie Globe Publishing Company and reversed as to all stockholders who prosecuted error, and the action as to them is dismissed.

Judgment accordingly.

Norval, C. J., concurs in the judgment solely on the ground last stated in the above opinion. Ryan, C., having been of counsel, took no part in the decision.