McCullough v. Moss

5 Denio 567

• Court: Court for the Trial of Impeachments and Correction of Errors
• Decided: December 15, 1846
• Status: Published

Opinion

Lott, Senator;

After a- careful examination of the act to incorporate the Rossie Lead Mining Company, (Laws of 1837, p. 441,) I have arrived at the conclusion that stockholders who were such at the time the debts due from the-corporation were contracted, and they, only, are liable for their payment. It was declared- by the second section of the act that the owners of the interests under the lease and the. supplemental agreement therein mentioned should be the owners of the capital stock in the proportion of their interests. They had, as appears by the contract of: September 12, 1836, with Moss and Knapp, previously formed themselves into a stock, company, and contracted for- the smelting and sale of the lead ore they should, obtain from the mines leased- to them. In this state of their- affairs, (which it. appears to me very important to bear- in mind' in giving a construction to.this act,) they, became incorporated by the same name which the joint stock company bore, and for the specific term to which their rights of mining were limited by the lease. The act of incorporation does not, however,- confer all the rights usually, incident to- a. corporation. A very important privilege, exemption of the stockholders from personal liability for its debts, is denied them, and they are made severally as well as jointly liable therefor.

If the ninth section had only declared this.personal liability of the stockholders and no provision bad been made by it and the tenth section for suing them, I apprehend there could be no reasonable doubt that it applied to those only who were such at the time the debt was contracted. That is referred to and spoken of in connection with this liability. It is moreover the natural construction. The right of the creditor accrues on the creation of the debt. As a general rule he can only look for its payment to the individual contracting it. If credit is given, it is on his means and responsibility, and - it appears to me that the intention of the legislature in securing the personal liability of the stockholder, was only to give the creditor the same security he would have if the company had not become incorporated. The latter part of the ninth and the tenth sections of the act impose no new obligation and create no new liability on the part of the stockholders, nor give any new right or security to the creditor. They only operate on his remedy to enforce and make available the right previously secured. It is declared that the creditor may sue any stockholder. There may be justice in giving him the election to sue either, one who was a stockholder when the debt was contracted or one who may have become so by a subsequent purchase at a reduced price in consequence of the outstanding debts at the time; but I cannot discover any principle either in. the nature of the business or the objects of the incorporation,' to justify a provision depriving him of a remedy against one owning stock at the time he gave the company credit, and limiting his right to seek satisfaction from a person who subsequently became a stockholder and to whose responsibility he never trusted. Such a provision would be unreasonable, and a construction which would lead to such a result should not be given to the act unless absolutely necessary to give it effect. And in my opinion it is not required, and would be inconsistent with its whole scope and design. The stockholders are declared to be liable for the payment of all debts. As soon therefore as a contract is made, the liability attaches, and of necessity to the stock holders at the time, and this cannot be divested except by satisfaction of the demand. It is not strictly a case of guaranty or suretiship, where laches or indulgence by the creditor would operate as a discharge. It is a burden imposed on each stockholder as one of the conditions of the charter, that he shall be a principal debtor for all debts or demands contracted- by the corporation while he is a member of it. The object of the legislature was doubtless security to those dealing with the company, and the construction given by the supreme court is the only one which can fully and effectually carry out that intention. If their remedy were confined to those owning stock when suit was brought, or when judgment was recovered, or execution issued or returned, great facilities would be afforded for those who had derived the benefit of the labor or property for which the debt was incurred, in the increased value of the stock, or by the receipt of dividends, to avoid personal responsibility by transferring their stock in anticipation of a suit to enforce payment. A creditor would by that means be deprived of the security upon which it is reasonable to presume he relied when the credit was given, and be compelled to seek redress from parties who were unknown at the time and whom he might have been unwilling to trust. It is no answer to this view of the case to say that if a fraudulent transfer was made the liability would not be discharged, and that recourse might be had to the prior holder of the stock. Proof to establish such a fact is always difficult, and it is not just or reasonable to impose the necessity of furnishing it on a creditor. I am aware that this construction is not in accordance with the decisions of the courts of Massachusetts and Connecticut on statutes of an analogous character, referred to in Moss v. Oakley, (2 Hill, 265.) Without examining the reasons assigned for those decisions, it is sufficient to say the}'- have no controlling authority. The principal case in Connecticut did not meet the unanimous, approval of the court; and as was shown by Justice Bronson in Moss v. Oakley, the others are distinguishable from the present case. Assuming, then, the rule above adopted to be correct, it remains to be considered whether the defendant is liable under it for the debt in question. The suit is brought on a negotiable promissory note purporting to have been made by the Rossie Lead Mining Company, payable one year after daté to the order of Moss and Knapp, and by them endorsed to the plaintiff. If the company were authorized in the exercise of its legitimate business to make it, the question is presented by the case whether its execution was proved. It is signed by J. Averill, as president, and D. C. Judson, as secretary ; and it is shown that they were such officers at that time, and that Averill was also “general managing agent.” There is, however, nothing in the nature of those offices as connected with the object and business of the company from which a general power to make notes could be implied. The affairs of the corporation were to be conducted by live directors, a majority of whom formed a board for the transaction of business, and a decision of a majority of those duly assembled as a board was requisite to make a valid corporate act. (1 R. S. 600, § 6.) The authority of the board to the president and secretary was therefore necessary to give validity to the note. This was not shown. The resolution passed at the meeting of the stockholders contained in the letter of the secretary dated October 6,1839, could not bind the corporation, especially so as to affect the members not present. When a charter invests a board with the power to manage the concerns of a corporation, the power is exclusive in its character. The corporators have no right to interfere with it, and courts will not, even on a petition of a majority, compel the board to do an act contrary to its judgment. (Angell & Ames on Corp. 121 to 123,151 to 164.) The stockholders as such, in their collective capacity could do no corporate act. The directors were their representatives and alone authorized to act. It is one pf the fundamental conditions of the contract into which the corporators have entered by becoming members of the corporation, that its concerns shall be managed in the manner prescribed by the act of incorporation, and from this no essential departure can be made. But if such a resolution properly passed were obligatory, and could have authorized the officers of the company to make the note, yet the objection to the proof was well taken. No original minutes of the meeting were produced, nor indeed was there any evidence that such a meeting had ever been held. The mere production of Judson’s letter stating it, did not prove the fact. Nor were the two records.of judgment against the company admissible as “persuasive evidence” of the authority of the president to make the note. They did .not tend to that object. Both of the notes on which they were recovered were dated Oct. 30, 1839, twenty-one days after the note in suit. If they had been concurrently given, and for the same consideration as is stated to have been the case in Moss against the company, (5 Hill, 139,) they might possibly have afforded some color of authority, or at least fortified the other evidence of ratification, provided the suits had been actually and in good faith defended, although the position is very questionable. But a judgment “ by default” in a suit which must be commenced by the service of the first process on the presiding officer, cashier, secretary or treasurer, if there be such officers, (2 R. S. 458, § 5,) and which, in the absence of proof of service upon the treasurer, I think it is fair to presume was commenced by such service, either on Averill the president or Judson the secretary, cannot, without it is shown to have come to the knowledge of the board of directors, have that effect; especially as against a defendant who was not a stockholder when it was obtained. It would in effect be establishing the principle, that one unauthorized act by the officers of a corporation would justify and legalize another. There was therefore no legal evidence of the execution of the note by the company, and the circuit judge erred in permitting it to be read. The proof afterwards introduced to show a subsequent ratification of the act, was insufficient to charge the defendant. To. have rendered it available as against him, it should have been shown that the act was adopted while he was a stockholder. He sold his stock on the 10th of December, 1839, and the note was made the*9th of October previous. The principal circumstances relied on to show a ratification during the intermediate time are the use of the personal properly, and the occupation of the real estate for which the note was given. That, however, was no evidence of a change of ownership. It was perfectly consistent with their prior relation to Moss and Knapp. The workmen who had been previously in their employment continued t.o work and occupy the premises as they had previously done. There was therefore no external change in the management of the affairs of the company. It is true one of the witnesses saw four of the directors at the works after the sale, and some of them there about the time it was going on. This cannot amount to a ratification. It is not inconsistent with the continuance of the smelting contract of September 12, 1846. But if it were not, the presence or indeed the active interference of individual directors would be inoperative and ineffectual. The concurrence of a majority of the board, when duly assembled, is requisite to constitute a valid act. The assent of the several members separately is not enough. (Livingston v. Lynch, 4 John. Ch. Rep. 596, 597.) The ratification of an unauthorized transaction can never be inferred from the acts of the very officers or agents by whom it was made. The assent or recognition of the principal must be shown. In any view of the case, therefore, I am of opinion that there was no proof either of the original execution of the note or its subsequent ratification. As however this defect may be supplied on a new trial, I will proceed to examine into its validity on the assumption that it was made by the authority of the board of directors.

The right of a corporation to make a promissory note for a debt incurred in the course of its legitimate business, altnough it is not expressly authorized to contract in that form, appears to be conceded in our courts. (Mott v. Hicks, 1 Cowen, 513; Att'y Gen. v. Life and Fire Ins. Co. 9 Paige, 470.) The power is indeed recognized by the revised statutes to exist in every corporation capable by law of making contracts. (1 R. S. 768, § 3.) But in the view I have taken of the case it is unnecessary to examine whether the Rossie Lead Mining Company had this power. I am satisfied that the note in question was given for purposes and objects unauthorized by its charter and therefore not obligatory. It was incorporated “ for the purpose of raising and smelting lead "ore or galena, at Rossie in St. Lawrence county,” with a capital of $24,000, divided between the members'of the company of the saíne náme, already'formed and in operation. It is declared by statute, (1 R. S. 600,"$ 3,) that no corporation shall possess or exercise any corporáte powers not expressly given in its charter or enumerated in the general powers given to all, excépt such as shall be necessary to the exercise of those so enúmerated. The note in question was given for part "of the consideration agreed'to be paid Moss and Knapp for their transfer to the company of real estate and property to be used as án addition to its capital. Every corporation has the" general power “ to'hold,'purchase and convey such real and personal estate as its purposes shall require, not exceeding' the amount limited in'its charter.” (1R. S. 600, § 1, sub. 4.) That however does not confer an unlimited discretion as to the amount of property so to"be held or purchased, óvén when there is no limitation as to it in the charter, especially when the business of the corporation requires a capital ihat is fixed and limited. It is always contemplated that the transactions óf the "company shall be limited to"its capital. Each’ stdclthóldér 'must be pfe- " stimed to be influenced by the fact, and particularly so when he can be made liable individually for the company’s debts. It is evident that the legislature,"in granting special privileges to a corporation, do'not contemplate that the capital shall be increased to an amount beyond that specified in the charter. That is made the basis' of security for the satisfaction of the debts of the "company, and no part of it can be withdrawn without the consent of the legislature. (1 R. & 601, § 2.) There' is an additional consideration, which appears to me' conclusive on the question. The ‘ whólé policy óf our law' requires that the entire capital shall' be paid in in cash, so as to furnish a substantial security for'the'Risóhárge'óf responsibilities incurred in its dealings. The' cdmpany cannot' receive any evidence of debt in lieu of cash, "in payment of Any portion of'its capital, ‘ nor permit any part of the cápital "tobe withdrawn. (Id.) 'The ivhdie policy of these'provisions would be evaded,""if the transaction under consideration were sanctioned. It appears by the - act of incorporation itself, that.the corporators were at the time of its passage the owners of.certain .rights, under.a lease to discover and work lead mines at Rossie, for a ,specific period. The.duration of the. charter-was limited to the same time. It is evident-therefore that its operations were intended to ,be limited and restricted to the.land in- the Iea.se referred.- to. -No additional capital was authorized or contemplated. By the mode adopted, however, it obtains», property as ap.addition, to.its capital to, the amount of ,i| 15,000, not by the payment of cash, but by incurring, a debt-for the whole sum, payable in-four annual instalments with interest. And-they were at perfect liberty! to part. with- the. whole of this the, next day, without having paid » cent therefor, and divide the proceeds among, the stockholders; and permit the vendor, .as,a creditor ¡for nearly two-thirds, of the entire actual capital, to come in and deprive to that extent, or at least ,in that proportion, tlie workmen and other bona,fide creditors of their, right to payment o,ut..of the capital; a result neyer.anticipated by the legislature. S.o on the. other hand, the . liability of; the individual. stockholders might be,increased ;far beyond .the..amount ever contemplated by them, witho.ut their receiving any benefit therefrom. If, however,-! am mistaken in this v.iew of the question,..and the corporation • had authority ¡.to make a. purchase,on credit of property.-deemed .necessary for its legitimate .purposes, yet I am -clearly of the opinion .that its powers .were exceeded in the purchase of the farm, the three acre lot, the school house, store, and threshing machine. It had no authority to engage in .agricultural or mercantile pursuits, or the education. of .youth. They were all very.laudable .pursuits, and .probably, as profitable . as. raising and smelting -ore; but they were foreign to the purposesfor..which, the .corporation-was created, .and obviously not necessary to carry, them, into. effect. .This is, indeed conceded , by the.learned. judge.who delivered.the.opinion in Moss against the company, (5 Hill 137,) which was adopted by the ppurt below, in .this case. He however, to justify ¡this purchase of property, which .to-use; his language, “.in the abstract-did not dome within the corporate powers of the defendants,” says, “ It seems the vendors were not willing to except any thing, and the defendants took the whole; and we must, if necessary, intend this was so on the presumption that they would not wilfully transgress their powers. It might therefore be inferred that they purchased the extra land, if any, the school house, threshing machine, &c. as a sine qua non to a bargain, which on the whole was valuable and pertinent to their business.” “ This,” he adds, “ they had a right to do.” To this doctrine I cannot yield my assent. No inference can be made in favor of a' body of limited powers, and it can afford no justification for an unauthorized or illegal act, that a lawful object could not be other- , wise attained. Individual stockholders, on becoming subscribers to the stock of a corporation, are apprized by its charter of the powers conferred upon its agents. These cannot be transcended by any considerations of expediency which they suppose may result to the stockholders from an act not within the scope of their authority. The relative rights of a corporation and its stockholders were considered in the case of the Hartford and New-Haven Rail-Road Company v. Croswell, (5 Hill, 383.) It was there held that “ no radical change or alteration can be made or allowed, by which new and additional objects are to be accomplished or responsibilites incurred by the company so as to bind the individuals composing it without their assent.” (p. 386.) The same rule was applied by Chancellor Kent to a private association, in Livingston v. Lynch, (4 John. Ch. Rep. ' 573,) above cited. The principle is a sound one, and appears to me conclusive on the main question in this case. It appears that the proprietor of the mining lands at Rossie gave leases of separate portions thereof to different individuals on which separate associations located. The Rossie Lead Mining Company held one; the Rossie Galena Company, incorporated at the same time, (Laws 1837, p. 445,) held another; and Moss and Knapp a third one; which latter was assigned to the Rossie Lead Mining Company as part of the consideration of the note in question. If instead of this lease, the rights of the “ Galena Company” had been purchased, I presume it would not have been contended that it was within the corporate powers. But there is no difference in principle between the cases. There are other provisions o‘f the contract which appear exceptionable. The power of smelting lead was, as it appears to me, clearly intended to be of such only as the company raised. It could not therefore assume the contract with Parish. The undertaking to carry out the stipulations of Moss and Knapp’s contract with Fitzliugh and Vandewater also seems to me to have been unauthorized.

There is another objection taken on the trial which I will briefly notice. It relates to the proof given to show that the account rendered for damages under the smelting contract did not form a part of the consideration of $15,000 for which in part the note in question was given. The relinquishment of mutual claims by one party against the other appears in the agreement itself to have entered into the consideration therefor. And although it may not, as Chief Justice Nelson says, have formed “ a part of the purchase money of the property sold and delivered to the company,” yet it does not follow that it did not constitute a part of the sum agreed to be paid by the company. It is true one of the partners of Moss & Knapp swears that the claim was thrown in although he considered it justly due, but that does not prove that the company would have paid the amount agreed on if that account had not been settled. Indeed it appears in the letter of Judson, that but for certain circumstances said to have been mentioned by Moss to him he would not have consented to give more than $12,500; but what the circumstances are is not stated. The claim amounted to more than $10,000. It does not appear, however, what the counter claims of the company were, and I have discovered no evidence to warrant the remark of the learned judge, so far at least as relates to the company, “ that these claims were mutu ally given up and cancelled without being taken into the at, count in putting a valuation on the property.” But whatever may have been the fact, it was not competent by parol testimony to show that the account formed no part of the consideration for the note in question. A written instrument cannot be contradicted’ nor explained' in this manner. If however- it" be conceded, as the learned chief justice says, that “ the evidence in no way contradicted the written- instrument, but- was entirely consistent with evéry part of it,” yet the circuit judge could’ not" decide, as a" matter of law, that the account' did- not enter into the consideration. That was á question for the determination of the jury.- The contract óüt of which it arose was entered into before’ the defendant became a stockholder, and he could not be held responsible for any right accruing under it. The plaintiff, ás endórsée of the note,- stands’ in the same situation as the payees. Hé took it Of them as a security for an antecedent debt, and of course subject to all equities between the original parties.- Hé was moreover bound to know that-the Company was limited in- its powers, and he’ cannot therefore in any way be considered a bona fide purchaser without notice. The sale óf a part of the property assigned by the agreement to the company, by an execution’, and of the balance by a receiver, Occurred after the defendant ceased to be a stockholder, and could not affect his rights'. It could not, indeed, under any circumstances, have made ihé original transaction valid. The rule on this subject was" properly laid down by Juáticé JeWett, in Hodge's v. The City of Buffalo, (2 Denio, 110,) in which he says, “It cannot be maintained that a corporation can by a" subsequent ratification máké good an act of its agent which it could not have directly empowered- him to do.”

If thése views are correct, the judgment off the supreme court is erroneous and must be reversed, and á venire de novo awarded.-

Putnam, Senator,

delivered a written opinion, maintaining the same views) except ih relation to" the time when a stockholder of the corporation was bound individually for its debts. Upon this point his opinion was as follows:

By the 9th section of the charter “ the stockholders of the said corporation shall be jointly and severally personally liable for the paynletit of all debts oí demands contracted by the said corporation, oi their authorized agent or agents, and any person having any demand against the said corporation may sue any stockholder, director or directors, in any court having cognizance thereof, and recover the same with costs.” The personal liability, if any, arises solely under this section. So far as I have been able to discover this question is now for the first time raised in this court. It is not, however, a new question. In Connecticut, the judges under a similar statute, have entertained opposite or different opinions as to the time the liability attaches. Our supreme court, in. the case of Moss v. Oakley, (2 Hill, 265,) under this same charter decided that only those who were stockholders when the debt was contracted, were liable. If the principle laid down by the court in that case is a, fair and correct construction of the statute, then the decision should be conclusive, upon this court: otherwise not. The first branch of the section makes the stockholders liable for the debts contracted. The other branch gives the remedy by suit against any stockholder, director or directors, in favor of any person having a demand. In determining the liability with reference to the time when it accrued, Justice Bronson was not free from difficulty, for he says : “ I do not, however, intend to lay much stress upon the particular wording of the section, for it must be admitted that the statute may be so construed without doing any violence to the language as to make it apply to those who were stockholders at the time the suit is commenced.” He disregarded the language of the section, which he admits may not refer to the stockholders when the suit is commenced; and taking his view of the question from the nature of the case and the general scope of the act, he comes to the conclusion that the liability refers to the stockholders who were such when the debt was made. When the intention of the legislature is plainly manifested in the language of a statute, and the object intended in the passage of the act, is attained, I know of no warrant or authority to look at the general scope of the act to determine its construction. What did the legislature intend by the section in question? The answer is plain : the intention is obvious. A personal liability of the stockholder, which is as absolutely obtained by the construction which the justice says may be given to the section, as in that settled upon by him, and arrived at by looking at the whole statute. Now each section of a statute must be construed by itself, and not borrow aid from other portions of the act, provided it is susceptible of such a construction as will be consistent with the general-provisions of the act. If we apply these rules to the section before us, we have no difficulty. It creates a personal liability, but token that attaches to the stockholder, the section does not determine. The supreme court infers or construes the statute to mean the time when the debt was created. Such an inference, I think, is not borne out by the language of the section. I repeat that the first branch of the section merely establishes the personal liability-. The next branch declares that, “any person having any demand against the said corporation may sue.” And who may be sued 1 “ Any stockholder,” is the answer given in the statute language; clearly referring to the time of the commencement of the suit, and thereby designating who is to be sued. He must be a stockholder when the suit is commenced. Now the liability and the person to be sued are clearly fixed. If the legislature intended that an old stockholder, or one who was so when the debt was created, might be sued, they would have said so, as they have in other charters. When there is difficulty in arriving at the construction of a statute, it is proper to take into view, the general system of legislation upon like subjects in order to aid in its construction. (3 Mass. 17, 21; 1 Pick. 248.) The act in relation to the Oriskany Manufacturing Company, (Laws of 1844, p. 34,) after fixing the personal liability clause adds, “ to be recovered of the stockholders who are such when the debt is contracted, or of any subsequent stockholder.” The charter of the Buffalo Gas-light Company, (Laws of1845, p. 277,) has precisely the same language. And where a different period or principle determines the liability, we find the legislature is particular in the language used, admitting of no doubt as to its construction. In the act relative to “ manufacturing incorporations,” passed in 1811, the personal liability clause is incorporated in the following language: “ and that for all debts which shall be due, and owing by the

company at the time of its dissolution, the persons, then composing such company, shall be individually responsible to the extent of their respective shares of stock.” The time when the debt was contracted was not the time fixed, nor was the time when the suit should be commenced, but the time of dissolution. Precisely the same language is used in the act to incorporate the Ballston Spa Manufacturing Company. (Laws of 1836, ch. 193.) The persons composing the company at the time of its dissolution, are made liable. I venture to say that every charter containing the personal liability clause, fixes by its terms the principle, and in language not to be mistaken. In two of the instances cited, those who are stockholders when the debt is created, are made liable, and in two other cases those at the dissolution of the corporation. In the case before us, I deem the language equally as decisive, referrring as it does to" the time when the suit is commenced. Looking then to the history of legislation upon the subject, going back to 1811, and coming down to the present time, we see that the language has been precise and definite, evincing much caution as to the terms used and leaving nothing in uncertainty to be determined or guessed out by our courts of justice. It seems to me that in the case before us the words of the statute are too plain to be misunderstood. They speak for themselves, and make the stockholders liable who hold stock when the suit is commenced. Without any qualifying language, the words, may sue any stockholder, must necessarily refer to the time when the suit is brought. A stockholder is to be sued; not one who was a stockholder. If correct in my view of the section, the plaintiff below had no cause of action against the defendant, as he had parted with his stock before the suit was commenced.

Van Schoonhoven, Senator, delivered an oral opinion in favor of reversal, expressing views similar to those contained in the opinion of Senator Lott.

Barlow and Talcott, Senators, delivered written opinions in favor of affirming the judgment, for reasons substantially the same upon which the cause was decided by the supreme court, and holding that those who were stockholders when the deb* of the corporation was contracted, were contemplated in the personal liability clause in the act of incorporation.

Gardiner, President, delivered a written opinion in favor of affirmance.

On the question being put, “Shall this judgment be revers edl” the members of the. court voted as follow's:

For reversal: The President, and Senators Backus, Deyo, Emmons, Hard, Lott, Porter, Putnam, Sanford, J. B. Smith, Van Schoonhoven—11.

For affirmance: Senators Barlow, Burnham, Jones, Scovil, Sedgwick, S. Smith, Talcott, Wheeler—8.

Judgment reversed.