Henley v. Myers

93 P. 168, 76 Kan. 723, 1907 Kan. LEXIS 318

• Court: Supreme Court of Kansas
• Decided: March 9, 1907
• Docket: No. 14,785
• Status: Published

Opinions

The opinion of the court was delivered by

Mason, J.:

On May 1, 1900, W. H. Stevenson recovered a judgment against the Consolidated Barb Wire Company, a Kansas corporation, in an action founded upon a tort. On December 7, 1900, an execution was issued, which was returned unsatisfied January 2, 1901, because no property could be found on which to levy. On June 27, 1903, Stevenson filed a motion for the appointment of a receiver to close up the affairs of the corporation. On September 12, 1903, E. E. Myers was appointed as such receiver. On October 6, 1903, the receiver sued several stockholders to collect the amounts for which they were liable in addition to their subscriptions, the action being based upon sections 1302 and 1315 of the General Statutes of 1901 (now repealed — Laws 1903, ch. 153), which authorized such procedure for the benefit of creditors. He recovered a judgment, from which the defendants prosecute error.

The most difficult question presented is whether the statute referred to protected the owner of a judgment founded on tort as well as claimants whose demands originated in contract. So much of it as is here important reads as follows:

“Sec. 1315. The stockholders of. every corporation, except railroad corporations or corporations for religious or charitable purposes, shall be liable to the creditors thereof for any unpaid subscriptions, and in addition thereto for an amount equal to the par value of the stock owned by them, such liability to be considered an asset of the corporation in the event of insolvency, and to be collected by a receiver for the benefit of all creditors.

“Sec. 1302. If any execution shall have been issued against the property or effects of a corporation, except a railway or a religious or charitable corporation, and there cannot be found any property upon which to levy such execution, such corporation shall be deemed to be insolvent; and upon application to the court from which said execution' was issued, or to the judge thereof, a receiver shall be appointed, to close up the affairs of said corporation. Such receiver shall immediately institute proceedings against all stockholders to collect unpaid subscriptions to the stock of such corporation, together with the additional liability of such stockholders equal to the par value of the stock held by each. All collections made by the receiver shall be held for the benefit of all creditors, and shall be disbursed in such manner and at such times as the court may direct.”

This statute was enacted while section 2 of article 12 of the state constitution was in force, reading:

“Dues from corporations shall be secured by individual liability of the stockholders to an additional amount equal to the stock owned by each stockholder, and such other means as shall be provided by law; but such individual liabilities shall not apply to railroad corporations, nor corporations for religious or charitable purposes.” (Gen. Stat. 1901, § 211.)

The constitutional provision was not self-operating (Woodworth v. Bowles, 61 Kan. 569, 60 Pac. 331), but may aid in the interpretation of the act passed in pursuance of'it.

A similar question arising upon similar statutes has frequently received the attention of the courts, but the authorities are not in entire harmony on the subject. In volume 1 of the fourth edition of Cook on Corporations, section 217, it is said:

“The statutory liability imposed upon the stockholders in corporations is a liability exclusively for debts and demands accruing against the corporation by reason of its contracts. It cannot, therefore, be enforced to pay damages recovered against the corporation in an action in tort.”

An.d in volume 26 of the American and English Encyclopaedia of Law, at page 1024:

“Unliquidated damages arising from the commission of a tort by the corporation or its agents are usually held not to be ‘debts’ within the meaning of that term as used in the statutes imposing liability upon stockholders. But in Ohio and South Carolina they have been held to be ‘dues’ within the purview of their statutes.”

On the other hand, the discussion of the subject in the valuable article on “Corporations” by the late Seymour D. Thompson in the Cyclopedia of Law and Procedure includes this statement:

“A judgment against a corporation is certainly a debt of the corporation, without reference to the question whether it was founded upon a tort or upon a contract. Hence, where it is sought merely to subject what remains unpaid by the shareholder in respect of his shares, it is clear that any demand against the corporation which has been reduced to a judgment will be available as a basis of such a proceeding without reference to the nature of the original claim. If it is merged in the judgment it becomes a ‘debt of record’ in the language of the common law; and upon this point there will be no difference of judicial opinion. So as already seen constitutional provisions and statutes securing to creditors dues from corporations by a superadded individual liability of their shareholders are remedial in their nature, and hence embrace judgments against the corporation for damages in actions for its torts.” (10 Cyc. 684.)

Manifestly the question whether a stockholder must respond to a demand of the character here involved depends upon the language of the constitutional or statutory provisions in virtue of which the liability is asserted. The decisions for the most part turn upon the force to be given to the word “debt.” While the statute under consideration does not use that word, much the same effect is produced by its employment of the term “creditors” to describe those for whose benefit the remedy is furnished. The word “debt” has several recognized meanings. Any financial obligation is a debt in a broad and general sense; but where the term is used technically and restrictively it implies an ascertained amount, and sometimes as well a foundation in contract. The same distinction exists in the use of the word “creditor,” which may mean one having any character of claim against another, or one having a liquidated demand based on an agreement. Illustrations of the various uses of these words may be found in volume of Words and Phrases Judicially Defined, at pages 1713, 1714, 1718-1721, 1891-1892; also in volume 8 of Words and Phrases Judicially Defined, at page 7628.

The cases in which stockholders have been held not'liable for demands against the corporation arising out of tort are collected in the works from which the foregoing quotations are made. (See, also, cases cited in Marshall, Corp. § 406.) They proceed upon the theory that such liability exists only with respect to obligations originating in contract. Where that view prevails it can make no difference that the claim has been placed in judgment, although that consideration is often spoken of as affecting the matter, for a judgment is not a contract in the sense that it can be regarded as in the nature of an agreement. (23 Cyc. 673, 674.) Nearly all of these cases are controlled by one or the other of these two reasons: (1) That the statute to be construed is penal, the stockholder’s liability being incurred only as a penalty for some act or omission of the directors, and on that account a strict construction is required; (2) that the statute uses some expression beyond the mere word “debt” — for instance, “debt contracted” — indicating that only contractual obligations are within its purview.

Neither of these reasons can have any application here. The statute quoted is clearly remedial, and beyond the bare use of the word “creditors” there is nothing in its language to suggest a limitation of its benefits to any particular class of claimants; indeed the clause making the double liability an asset of the corporation tends strongly against such restriction.

In Ward v. Joslin, 100 Fed. 676, 105 Fed. 224, 44 C. C. A. 456, it was held that under the Kansas laws as they existed prior to 1899 a judgment against a corporation, to be available as a demand against a stockholder, must have been based not only upon a contract but upon such a contract as the corporation had legal authority to make, and the decision was affirmed by the supreme court. (Ward v. Joslin, 186 U. S. 142, 22 Sup. Ct. 807, 46 L. Ed. 1093.) The statute there considered (Gen. Stat. 1889, § 1192) provided that if any execution against a corporation proved fruitless liability should attach to the stockholders, but in other sections of the same act (Gen. Stat. 1889, §§ 1204, 1206) the liability was described as one for the payment of debts. In each opinion the word “dues,” occurring in the constitution, was treated as relating only to contractual obligations. The statute now under consideration differs materially from the earlier one, and the presence of the provision making the double liability an asset of the corporation affords especial ground for applying the arguments thus made in favor of giving the word “dues” a broad meaning in Rider v. Fritchey, Adm’r, 49 Ohio St. 285, 30 N. E. 692, 15 L. R. A. 513:

“Can the stockholders of an Ohio corporation be held for obligations of the corporation growing out of.torts? It follows from what has already been stated that we must' assume that this street-railroad company was' organized under a law which imposed upon stockholders just such liability as the constitutional provision requires. We look, therefore, to the constitution as our guide. The provision, section 3 of article 13, is: ‘Dues from corporations shall be secured by such individual liability of the stockholders, and other means, as may be prescribed by law; but, in all cases, each stockholder shall be liable, over and above the stock by him or her owned, and any amount unpaid thereon, to a further sum, at least equal in amount to such stock.’ The question turns upon the import of the word ‘dues.’

“It has been contended that provisions creating individual liability on the part of the stockholders are in derogation of the common law, and are, therefore, to be construed strictly. Authorities in support of this rule are not wanting, and, in so far as such liability is attached by way of penalty for the omission of some act required by the statute, as in some of the states, it is probable that the weight of authority favors the proposition. But all concede that this is a remedial provision, and to hold that there must be applied to it the same test as if it were a penal law is to hold that all remedial laws must be so construed, for every remedial law must of necessity be in derogation of the common law. Where the provision is simply remedial, though it .does impose an obligation which did not attach at common law, we see no reason to insist upon what is called a strict construction, but believe that the ordinary rule which requires the court to inquire simply as to the intent of the lawmakers, reading the provisions as they were intended to be read, will best attain the ends of justice. This leads us to look to the intent of the section quoted. Speaking in general terms, it must be manifest that the intent was to provide that’those who derive advantage from the authority of the state, given by our incorporation laws, shall, at the same time, assume responsibility for the acts of the artificial creature which they have called into legal being affecting the rights of others. Having in mind this general intent, and the provision being remedial, it should, we think, be construed with a view to remove the evil and extend the benefit proposed. . . . It would seem to be the undoubted duty of the court to give the word ‘dues,’ as found in the section quoted, such construction as will secure the apparent object of the constitution makers in its adoption. Constitutions are necessarily couched in terse language, and we look there for the use of words in a broad, comprehensive sense. . . . It is difficult to see any reason why the framers of the constitution should intend to afford one who gives credit for goods or money to. a corporation a right to demand compensation of the stockholders in case of insolvency, and deny a like right to one who entrusts it with the care of his person, as in the case of a passenger, or to one, even a stranger, who, without fault on his part, is injured by the negligence of the corporation’s agents. It may well be asked: Are the rights of things more sacred than the rights of persons? Is there any rule of public policy which would justify the protection of rights arising ex .contractu, which would not equally call for protection of rights arising ex delicto, or any claim for unliquidated damages? ... As conclusion, we are of the opinion that the word, ‘dues’ should receive a beneficial construction, one which will include within its scope as well a demand fof unliquidated damages for a tort as a claim for a debt arising upon contract.” (Pages 292, 294, 295.)

This reasoning was approved and adopted in Flenniken v. Marshall, 43 S. C. 80, 20 S. E. 788, 28 L. R. A. 402. We regard it as sound and convincing, and in principle decisive of the question here presented in favor of the view taken by the trial court.

A further contention made by plaintiffs in error is that, granting a judgment against a corporation for a tort to be an obligation for which under any circumstances a stockholder might be held upon his additional liability, the present action cannot be maintained because the section referred to was repealed before its benefit had been invoked by the making of an application for a receiver. (See Laws 1903, ch. 152, effective March 17, 1903.) As the judgment was not based upon a contract, the legislature doubtless had power by taking away the remedy to deprive the creditor of the means of enforcing its payment. (Louisiana v. Mayor of New Orleans, 109 U. S. 285, 3 Sup. Ct. 211, 27 L. Ed. 936.) But such power was not attempted to be exercised in this instance; for, while the repealing act itself contains no saving clause, there must be read into it a reservation in favor of any right accrued as well as of any proceeding commenced, in consequence of the first paragraph of section 7342 of the General Statutes of 1901, which reads:

“The repeal of a statute does not . . . affect any right which accrued, any' duty imposed, any penalty incurred, nor any proceeding commenced, under or by virtue of the statute repealed.”

When the judgment had been rendered and the insolvency of the corporation had been demonstrated by the issuance and return of an execution nulla bona a right at once accrued to its owner, under the existing statute, not only to have a receiver appointed for the coi-poration, but by this means to enforce the stockholders’ liability to him. This right by the terms of the statute quoted survived the repeal, although no proceeding had been begun to assert it. This proposition is substantially covered by the decision in Wire Co. v. Stevenson, 71 Kan. 64, 79 Pac. 1085, although there the question presented was only whether a receiver could be appointed, his right to maintain an action against the stockholders not being involved.

It is next claimed that if any cause of action of the character here presented ever existed against the plaintiffs in error it had been barred by the statute of limitations before steps were taken to enforce it. The corporation permanently suspended business January 15, 1899. It is argued that with the expiration of one year from that date a right accrued to Stevenson to bring action directly against the stockholders of the corporation under sections 1200 and 1204.of the General Statutes of 1889, which authorized such a proceeding; that this right was barred by limitation because not exercised within three years; and that, under the authority of Cottrell v. Manlove, 58 Kan. 405, 49 Pac. 519, when the bar was permitted to fall against this remedy it excluded every other as well. A fatal fault with this argument is that the sections referred to were repealed January 11, 1899, several days before the corporation ceased to do business, and more than a year before such cessation had continued long enough to warrant a direct action against the stockholders. (Laws 1898, ch. 10, § 17.) Therefore no right of action accrued to Stevenson under them prior to their repeal, and after their repeal the only remedy against stockholders left to eorporate_ creditors whose claims were based upon torts was that by the appointment of a receiver. (Henley v. Stevenson, 67 Kan. 4, 72 Pac. 518.) To pursue this remedy it was necessary that he should first of all reduce his claim to judgment. This he accomplished May 1, 1900, and no want of diligence can be attributed to him prior to that time.

It is further contended, however, that it was incumbent upon Stevenson to cause the commencement of an action against the stockholders, or at least to apply for the appointment of a receiver, within three years from the time judgment was obtained. The application was not made until September 12, 1903, and the action was not begun until October 6, 1903. Before he could ask for a receiver, however, it was necessary that the insolvency of the corporation should be exhibited by the issuance and return of an execution. It was within the power of the judgment creditor to cause these preliminary steps to be taken at any time, and he could not extend the statute of limitations indefinitely by neglecting to act. It was incumbent upon him to perfect his right of action within a reasonable time, which could never be more than the statutory period. (West v. Bank, 66 Kan. 524, 527, 72 Pac. 252, 63 L. R. A. 137, 97 Am. St. Rep. 385.) He took out an execution December 7, 1900. Whether this would under all circumstances be deemed reasonable promptness need not' be determined. Pending the settlement of a case-made a stay of execution was granted, which expired October 9, 1900. Until that time, therefore, no attempt could have been made to enforce the judgment. The record shows that the defendant in error consented to the stay order, but even if this can be regarded as a voluntary submission to a suspension of proceedings the delay so occasioned, in view of its purpose to facilitate a review, cannot be deemed an unreasonable one. The interval between the expiration of the stay and the issuance of an execution — from October 9 to December 7 — was hardly long enough to show a lack of diligence; but even this need not be decided, for the present action was begun not'only within three years from the return of the execution but within three years from the end of the stay, and was therefore brought within due time, irrespective of ■ any further allowance for the taking of the preliminary steps.

The plaintiffs in error were stockholders in the Consolidated Barb Wire Company from some time in 1887 until January 15, 1899, when they sold their stock in good faith. The transfer was duly entered upon the books of the company, but no statement of such change of ownership was ever filed with the secretary of state. Section 1283 of the General Statutes of 1901, which took effect January 11, 1899, provides:

“It shall also be the duty of the president and secretary of any such corporation organized under the laws of this state, as soon as any transfer, sale or change of ownership of any such stock is made as shown upon the books of the company, to file with the secretary of state a statement of such change of ownership, giving the name and address of the new stockholder or stockholders, the number of shares so transferred, the par value, and the amount paid on such stock. No transfer of such stock shall be legal or binding until such statement -is made as provided for in this act.”

In the original act there followed this proviso, which has since been repealed, but which is of importance as indicating clearly that the restriction on the transfer of stock was intended to affect the matter of the personal liability of stockholders:

“Provided, however, that no transfer of stock shall release the party so transferring from the liability of the laws of this state as to stockholders of corporations for profit, for ninety days after such transfer and the filing and recording thereof in the office of the secretary of state.” (Laws 1898, ch. 10, § 12.)

The ground of the claim against the plaintiffs, in error is that by reason of the statute quoted the sale of their stock was not effective to relieve them from liability for the debts of the corporation because no record of it was ever made in the office of the secretary of state. English and federal cases hold that, where one who has transferred his stock- remains charged with corporate debts because the transfer is not properly registered, it is upon the principle of negligence on his part, and that he can relieve himself from liability by showing that he has been reasonably diligent in the matter and that the fault has been that of the company’s officers. (10 Cyc. 716, 717.) The statute here involved is too explicit to leave room for construction. It makes the liability absolute until the required statement is filed. The duty to supply such record is imposed upon the president and secretary and not upon the stockholders, but this is true as well of the ordinary requirement that to be effective transfers must be entered in the books of the company. In either case it can hardly be doubted that the transferrer can if necessary have the aid of the courts to see that the duty is performed. (19 A. & E. Encycl. of L. 881, 882.) Probably if a stockholder were driven to that remedy, the registration, when made in pursuance of an order so obtained by him, would by relation be effective from the time his proceeding was begun. Or it may be that any affirmative action on his part — a mere request or demand that the officers perform their duty — might relieve him from liability. . But no such question is here presented, for it is not shown that any step was taken by the plaintiffs in error to compel or to urge a compliance with the law.

The argument is strongly pressed, however, that the statute is invalid as to those who already owned corporate stock at the time of its enactment, for the reason that it seeks to change their contractual liability— to impair the obligation of the contract which resulted from such ownership. We cannot agree to this contention. Before the act was passed one who had sold stock of a corporation, in order to relieve himself from liability for its debts, was obliged to see that the transfer was noted by its officer upon its books; the enactment merely imposed an additional duty to see that a similar notation was made upon a public record. The change imposed no restraint upon the transfer of the stock, but related only to the means by which it should be accomplished and the manner in which it might be evidenced; it is essentially a matter of method — of procedure — rather than of ultimate substantial rights.

(93 Pac. 173.) SYLLABUS BY THE COURT. 1. Corporations — Liability of Stockholders — ‘‘Dues.” In the provision of the Kansas constitution (Art. 12, § 2; Gen. Stat. 1901, § 211, repealed in 1906) that “dues from corporations shall be secured by individual liability of the stockholders to an additional amount equal to the stock owned by each stockholder” the word “dues” was used in a sense broad enough to cover a judgment rendered against a corporation in an action founded upon tort. 2. -Rights of Creditors — Unsatisfied Execution — Judgment for Tort. In view of such interpretation of the constitutional provision referred to, section 1192 of the General Statutes of 1889 (repealed by chapter 10, Laws of 1898), authorizing the owner of a judgment against a corporation upon which an execution had been returned unsatisfied to proceed against any of the stockholders and hold them liable thereon to the extent of the amount of their stock, applied to judgments founded on tort as well as upon contract, notwithstanding that elsewhere in the sainé act the person to whom the right is given is described as a creditor of the corporation and the claim against it as a debt.

“Whether the state may impose added conditions or duties upon individuals with regard to their contracts depends upon the nature of such requirements; if they amount to a change of the obligation itself they are of course ineffectual; but an obligation cannot be said to be impaired by a statute which merely imposes an additional duty on the owner in order that he may preserve it; therefore recording acts and acts of kindred nature are constitutional.” (8 Cyc. 994.)

The judgment is affirmed.