Marshall-Wells Hardware Co. v. New Era Coal Co.

100 N.W. 1084, 13 N.D. 396, 1904 N.D. LEXIS 52

• Court: North Dakota Supreme Court
• Decided: October 19, 1904
• Status: Published

Opinion

Morgan, J.

This action is brought by the plaintiff on behalf of itself and all other creditors of the New Era Coal Company, a corporation organized under the laws of this state. The plaintiff furnished the New Era Coal Company goods and merchandise, for which payment has been refused. Other claims for merchandise by other persons against this corporation, duly assigned to the plaintiff, are also included in plaintiff’s cause of action. The coal company is alleged to be insolvent, and its directors and stockholders are made defendants in this action, and judgment is asked against them for these creditors’ claims, pursuant to the liability imposed upon them for all debts of the corporation to the extent of the amount of unpaid stock. The plaintiff is a general creditor only, and its debt has not been reduced to judgment. The Second National Bank of Minot was also a creditor of said New Era Coal Company, and had commenced two actions upon its claims against said corporation. One of these actions was founded on a debt secured by a miner’s lien, and the action was brought to foreclose such lien. All other lienholders against tíre defendant’s property were made parties to that action. The New Era Coal Company appeared in that action. The other action against the coal company was a money demand action. Both of these actions were pending when this action was commenced. The relief prayed for in this action is that creditors be required to exhibit their claims and become parties to this action; that all proceedings by other creditors be restrained; that the amount due plaintiff and all other creditors be ascertained; that an account be taken of the' property and debts due to and from said company, and if, upon such account, it shall appear that the defendant corporation is insolvent, that the court shall proceed and ascertain the liabilities of each of the defendant stockholders; that a receiver of the property of such corporation be appointed, and such property be converted into. cash, and, if the proceeds of the property be insufficient to pay the debts of said corporation, that the stockholders be adjudged to pay the same; and that the court adjudge the amount payable by each of said defendants, Wm. Von Steinwehr, E. C. Cole, E. Y. Sarles, Seth G. Wright, F. B. Mills, O. P. Carter, R. S. Lewis and Harry Richards, and that the proceeds of the corporation’s property be distributed among the creditors as provided by section 5779, Rev. Codes 1899.

Before issue was joined in this action, the plaintiff procured an injunction restraining the Second National Bank of Minot from proceeding with its actions. This injunction was procured on-notice, and the said bank appeared at the hearing and resisted the granting of the injunction. The injunction was based on an affidavit reciting no facts as grounds for granting the injunction except the commencement of this action on behalf of itself and all other creditors. It recited as grounds for granting the injunction the commencement of this-" action, and the complaint was made a part of the affidavit. It further stated that, “if said Second National Bank of Minot is permitted to prosecute to a conclusion its said actions, this court will be unable to grant the full and complete relief prayed for in the above-entitled action.” The district court granted the injunction, and this appeal is from the order granting the same.

Two questions present themselves for consideration under the facts set forth: (1) Whether a plaintiff in- this class of actions can maintain the same, as a general creditor, before reducing his claim to a judgment and exhausting all his legal remedies; (2) whether section 5773, Rev. Codes 1899, authorizes an injunction in such actions without a showing therefor, as required in equitable proceedings generally. Respecting the first question we are agreed that such action will lie by a general creditor on behalf of himself and all the other creditors before his claim is reducel to judgment. The cause of action is based upon section 2902, Rev. Codes 1899, which provides that “each stockholder of a corporation is individually and personally liable for the debts of the corporation to the extent of the amount that is unpaid upon the stock held by him,” etc. This section makes the stockholders liable for the debts of the corporation to the amount of the stockholders’ unpaid stock. The stockholders’ liability is not conditional nor secondary under said section. It is primary liability, and accrues as soon as the debt is contracted. It may be enforced as a personal liability by the proced-' ure laid down in sections 5767-5770, Rev. Codes 1899. The action to enforce the stockholders’ liability under section 2902 is an equitable action, and involves the adjustment of all creditors’ rights, and the' liability of the stockholders to the creditors and among themselves as stockholders. The stockholders’ liability under section 2902 is not subject to conditions nor secondary, but is an absolute liability to the extent of the unpaid stock subscriptions. Section 5767 reads as follows: “In an action against a corporation upon a claim for which its stockholders, directors, trustees or other officers, or any of them, are liable by law in any event or contingency, one.or more or all of the persons so liable may be made parties defendant by the original or by an amended or supplemental complaint, and their liability may be declared and enforced by the judgment in such action.” Section 5769 provides that “whenever any creditor of a corporation shall seek to charge the directors, trustees, or other officers or stockholders thereof on account of any liability created by law, he may commence and maintain an action for that purpose in the district court and may at his election join the corporation in such action.” Said section 5770 provides: “The court shall proceed therein as in other cases, and when necessary shall cause an account to be taken of the property and debts due to and from such corporation and appoint one or more receivers who shall possess all the powers conferred and be subject to all the obligations imposed on receivers by the provisions of section 5765; but if, upon .the filing of an answer or upon the taking of such account it shall appear that the corporation is insolvent and that it has not property or effects to satisfy such creditor, the court may without appointing any receiver, proceed to ascertain the respective liabilities of such directors, trustees or other officers and stockholders and enforce the same by its judgment as in other cases.” Under these sections the action is not strictly one to sequester the property of a corporation. As the complaint is framed, some of its allegations would indicate that the action is one brought for that purpose. But the action for sequestration alone is 'authorized by section 5161, Rev. Codes 1899, which provides that such action is to be brought by a judgment -creditor. The sections under which this action is brought are practically like the sections of the Wisconsin Code construed in Booth v. Dear et al., in 96 Wis. 516, 11 N. W. 816, and the following construction is given there: “It is quite clear that a proper construction of sections 3223 and 3224 [Rev. St. 1818] * * * does not require that the assets of the corporation shall be fully exhausted before the creditors may proceed to judgment against the stockholders. The legislative intent obviously was that the court should so administer the affairs of the corporation as to satisfy its liabilities out of its assets so far as practicable, and, upon the fact appearing that the stockholders’ liability would be required in order to fully pay the corporation debts, to enforce such liability, and, if necessary, by judgment against such stockholders. It is therefore sufficient to warrant proceeding to judgment in an action of this kind that it be made to appear that the liability of the stockholder will have to be ultimately resorted to in order to fully pay the corporation debts. The facts in that regard do not go to the cause of action. Therefore it is not essential to the complaint that such facts be alleged therein. It is sufficient to allege and show that the plaintiff is a creditor of the corporation, having a debt due and payable; that he sues on behalf of himself and all other creditors of the corporation; that the defendants are stockholders liable for such indebtedness. * * * Prior judgment against the corporation in the action to enforce such liability is not necessary to exist or be pleaded, or want of assets of the corporation to meet its liabilities.” See, also, Williams v. Meloy, 97 Wis. 561, 13 N. W. 40. Our conclusion is that the stockholders’ liability is primary and absolute under our statutes; that its extent may be determined in an action under sections 5161 to 5110, supra; that their liability may be determined in such an action without the appointment of a receiver; and that the rights of such creditors as participated in such action by filing their claims, as well as the extent of the liability of stockholders, may be determined by the judgment in such action, and it may be done without the appointment of a receiver or with it, depending upon the facts of each case. These sections lay down a rule of procedure in actions by a creditor for himself and on behalf of other creditors, and such procedure is independent and different from the action contemplated by section 5761. Under section 5767 it is clear that the action named therein is not intended to be based upon a judgment. The action therein named is one “upon a claim.” The word “claim,” it is clear, cannot there be intended to be synonymous with the word “judgment.” The sections, considered together, are clearly intended to contemplate a suit by a general creditor in behalf of himself and others whose claims have not been reduced to j udgment. The action under these sections is different in its scope from the action authorized by section 5761, Rev. Codes 1899. In the latter action stockholders are not parties. The relief sought pertains only to the corporation as such, and no relief is obtainable against the stockholders. Clark v. Banner, 50 Wis. 416, 7 N. W. 309.

Before issue was joined an injunction was granted by the district judge pursuant to section 5773, Rev. Codes 1899, which reads as follows: “Whenever any action shall be commenced against any corporation, its directors, trustees or other officers, or its stockholders according to the provisions of this article, the court may, by injunction on the application of either party and at any stage of the proceedings, restrain all proceedings by any other creditor against the defendant in said action, and whenever it shall appear necessary or proper may order notice to be published * * * requiring all the creditors of the corporation to exhibit their claims and become parties to the action, * * * and in default thereof such creditors shall be precluded from all benefit of the judgment which shall be made in such action and from any distribution which shall be made under such judgment.” It is contended that it is an abuse of discretion to grant the injunction under the facts as they existed when it was granted. The Second National Bank of Minot had commenced -an action to foreclose its lien against the real property of the New Era Coal Company. It made all other lienholders parties to its suit, under section 4810, Rev. Codes 1899. It is contended that the mere institution of a suit by one creditor for the benefit of all creditors against an insolvent corporation is alone sufficient to warrant the court in issuing an injunction against the prosecution of other pending actions. The object to be gained by such injunction is to consolidate the claims of all creditors into one suit for the benefit of all. This is done to avoid unnecessary costs, and to avoid the securing of undue advantage by one creditor over another, and to avoid the sacrifice of the corporation’s property by unnecessary suits or proceedings. It might be issued as a matter of course to restrain money demand actions. In short, the action invests the court with discretion as to when this injunction will be issued. In determining when the injunctional order shall issue, the same principles, or at least analogous principles, will govern as in the granting or refusing of an injunction under the regular equitable procedure. Whether the suit to be restrained is one for money only or for foreclosing securities, whether a receiver has or will be appointed, and whether the general creditors of the corporation will be benefited by an injunction against other suits, are proper facts to be considered in determining whether such injunction shall issue or not. The action is an equitable action (Cook on Stockholders, section 204), and the question when this injunction shall issue is to be determined upon the facts, with a view to a proper equitable adjustment of all the creditors’ rights as well as those of the stockholders. Said section 5773 is not mandatory, but permissive, in its terms. Under it creditors may be required to exhibit their claims and to become parties to the creditors’ action. But it is not compulsory that they exhibit or file their claims. It is optional with them whether they shall exhibit their claims or not. If they refuse to exhibit or file their claims, and thus become parties to the creditors’ action, they are denied any benefit in the distribution to be made by the judgment, and suffer no other penalty by not .joining in the creditors’ suit. If -lienholders become -parties to the creditors’ suit, their liens are protected in the creditors’ suit, and are paid in preference to unsecured creditors by the positive requirements of section 5779, Rev. Codes 1899. But whether they shall be required to exhibit their claims in the creditors’ suit is also discretionary with the court. This discretion is tontroll-ed or moved by the facts as they appear on the application for the injunction under section 5773. In 'this -case the records show that the property involved -in the creditors’ suit was valued at $4,000, and the liens covering it, which were also involved in that suit, amounted to about $7,000. It is therefore obvious that general creditors could gain nothing by attempting to have the property covered by this lien distributed in the creditors’ suit, as the proceeds must be distributed to the lienholders to the amount of their liens before payment of the creditors in general. If these lienholders chose to not join in the• creditors’ suit, they should be allowed to enforce their liens by their own,suit, and, under the circumstances, it was an abuse of discretion to compel them to join in the creditors’ suit. In this case no receiver has been appointed. To enjoin a suit by a secured creditor for the enforcement of his lien-is an abuse of discretion unless a receiver has been appointed to preserve the property; and this is true of a mere money demand action, where the corporation has property out of which payment may be exacted by the creditor through such suit. The secured creditor and the general creditor also are each entitled to the property of the corporation preserved intact by a receiver for the satisfaction of their claims. In case a receiver has been appointed, a different question would arise, so far as discretion in granting an injunction is concerned. In a case where the general creditors would have an equity in the corporation’s property after the liens were satisfied, a different conclusion might follow, and such an injunction be properly granted, in case a receiver had been appointed. All such matters -are for decision by the court on the application for the injunction. We hold that section 5773 vests a discretion in the court in granting or refusing the injunction. A showing of strictly equitable grounds for an injunction is not necessarily to be made, nor an undertaking necessarily required, in every case. In the present case the district court abused the discretion vested in it by granting the injunction when no benefit could follow to the general creditors, -and also because no receiver had been appointed to protect the property, and to keep it for the benefit of the secured creditors first, and then for the equal benefit of all unsecured creditors. Section 5773 must be construed in reference to the objects intended to be gained by its enactment, in connection with the other section quoted — that of distributing the corporation’s property according to the rights of all the parties concerned. To construe it as arbitrarily authorizing an injunction whenever such an action as this is commenced would render it in this and many other cases an instrument of injustice. The construction given to it by us does its language no violence, and is in accordance with its spirit and purpose.

So far as the trial court restrained the suit to foreclose the lien its action was erroneous, and must be reversed. As to the injunction against the suit for a money judgment, it is affirmed, it not appearing that the corporation has any property except that covered by the liens embraced in the foreclosure suit. The appellant will recover its costs and disbursements in both courts.

(100 N. W. 1084.) -All concur.