Beals v. Buffalo Expanded Metal Construction Co.

Spring, J.: The. plaintiffs are judgment creditors of the corporation defendant and have brought this action to obtain a judgment sequestrating its property in pursuance of section 1784 of the Code of Civil Procedure. The contention is that the defendant Schmidt is a debtor of the company to the amount of stock for which he agreed to pay $10,000, and that indebtedness is an asset of the corporation and chargeable with the payment of its debts. It was not necessary that certificates of stock be issued to Schmidt to constitute him a shareholder of the corporation. Ilis subscription created that relation. (Morawetz Priv. Corp. § 56 ; Kohlmetz v. Calkins, 16 App. Div. 518.) He accepted the directorship and presidency, acted in these capacities, and assumed duties in recognition of his connection with the company as stockholder by virtue of his subscription agreement, and he cannot now disclaim the existence of that connection. (Wheeler v. Millar, 90 N. Y. 353; Powers v. Knapp, 71 Hun, 371.) Article 3 of title 2, chapter 15, sections 1784-1796, provides a method for the dissolution of a corporation and also to enforce by action “ the individual liability of the officers or members of a corporation.” Section 1790 in this article permits the creditor to make the officers and members of said corporation parties, if they — 592 — “ are made liable by law, in any event or contingency, for the payment of his debt; * * * and their liability may be declared and enforced by the judgment in the action.” Sections 1792,1793 provide for the ascertainment of each defendant’s liability, and for a “ distribution of the property of the corporation ” among its creditors ; and by section 1794, if the property of the corporation is inadequate to meet its obligations, the judgment “ must adjudge that each stockholder pay into court the amount due and remaining unpaid on the shares of stock held by him, or so much thereof as is necessary to satisfy the debts of the corporation.” It will be observed that while the theory of this scheme is primarily the sequestration of the property proper of the corporation at the instance of a creditor, yet to prevent resort to another action a stockholder may be included as a party. His liability need not depend upon the fact of his personal liability by virtue of his membership in the corporation, but if it exists “ in any event or contingency,” he may be brought in and made to respond. The claim in this action is that the defendant Schmidt owed the corporation the amount of Ms stock subscription, and that liability is sought to be enforced as a debt due the company, and, hence, amenable to its creditors. The enforcement of that indebtedness is within the letter and spirit of this article, and, as the suit is in equity, the rights of all the parties can very properly be adjusted in one action. As was said in Stoddard v. Lum (159 N. Y. 265) at page 273: “ Subscribers to the stock of a corporation incur a debt which may be enforced by any common-law or equitable remedy. * * * The capital stock of a corporation is a fund set apart for the payment of its debts. It is a substitute for the personal liability which subsists in private copartnerships. The creditors have a lien upon it in equity. Unpaid stock is as much a part of this pledge and as much a part of the assets of the company as the cash which has been paid in upon it.” It is urged on behalf of the defendant that he never was liable for the payment of this stock; that the agreement which accompanied his subscription must be read in connection therewith. That is probably true as to the parties to it, but not as to the creditors of the corporation. His subscription was an absolute agreement to become a shareholder to the extent of $10,000. The certificate — 593 — provided for a corporation within the Business Corporation Law (Laws of 1890, chap. 567, as amd. by chap. 691 of the Laws of 1892), and section 5 requires payment of one-half of the capital stock of such a corporation within one year from its incorporation, and by the Stock Corporation Law (Laws of 1890, chap. 564, as amd. by Laws of 1892, chap. 688), section 41, each subscriber shall pay ten per centum of his subscription in cash. A secret agreement by which the shareholders can evade these mandatory statutes is against public policy and will not be upheld against creditors. (Yonkers Gazette Co. v. Jones, 30 App. Div. 316; Armstrong v. Danahy, 75 Hun, 405 ; White Mountains Railroad v. Eastman, 34 N. H. 124.) Cook on Stock and Stockholders says (at § 137): “ Neither party is permitted to prove a different contract from that expressed in the written instrument. Under the rule not even a separate written contemporaneous contract is admissible to change the subscription contract.” (See, also, Id. § 191.) The defendant accepted offices and did acts permissible only by a stockholder. If his secret agreement were to be operative, he could receive the honors consequent upon his apparent ownership of onelialf of the capital stock of this moneyless corporation, but hoist the agreement to prevent a creditor enforcing any demand against him. Had dividends been declared his ownership of capital stock would not have been questioned by him. It is urged, with much plausibility, that even if Schmidt be a stockholder the remedy adopted by the plaintiff is not the proper one, but his action should have been under section 54 of the Stock Corporation Law. That plaintiff has no better standing than the corporation itself, and as all the stockholders fathered the private agreement, no action would lie at its instance against Schmidt to recover his stock subscription. As I have already sought to show, the purpose of the statute is more extended than might be inferred from section 1784 of the Code taken by itself. Beyond the sequestration of the property of the corporation in its custody, the relief reaches out for whatever liability can be acquired. Nor is this restricted to what technically belongs to the corporate entity, but liability “ for the payment of the debt” of the creditor is one of the tests for making a stockholder a party. — 594 — . It is asserted that an action under section 54 of the Stock Corporation Law would have enabled defendant to assail the verity of the judgment. Section 55 of that law makes the recovery of a judgment and the issuance of an execution necessary preliminaries to an action against the stockholder, “ and the amount due on such execution shall be the amount recoverable, with costs, against the stockholder.” If the judgment is incorrect in amount or collusively obtained, whether the action be pursuant to the Code provisions or to the Stock Corporation Law, an opportunity may be given to test its validity. The plan outlined in the Code does not in terms make the judgment conclusive against a creditor. If such be the fact, however, then, as in the other case, it may be incumbent lipón him to apply to reopen the judgment and defend. However, that question does not seem to be specifically raised in this case. All the facts appear upon which the defendant’s liability can be established in either case, and the discussion of what remedy should have been resorted to is somewhat academic, as the relief granted in this suit, in connection with the stipulation, protects the rights of all the parties. We come now to a question of considerable difficulty in this somewhat intricate case. On the eleventh day of May the defendant Schmidt assigned and transferred all his interest arising under his agreement and that was ratified by the directors of the corporation. One-half of the judgment debt was incurred subsequently to this transfer, and it is strenuously contended that the assignment ended the liability of this defendant. Section 48 of the Stock Corporation Law provides that every transfer of the stock in a • corporation “ in contemplation of its insolvency ” shall be void. It has been held, however, that a transfer in good faith, even where the stock had not been fully paid up, is valid against future creditors. (Sinclair v. Fuller, 158 N. Y. 607; Rochester & K. F. Land Co. v. Raymond, 158 id. 576; Close v. Brady, 4 Misc. Rep. 474; affd., 144 N. Y. 648.) There is, however, another obstacle preventing defendant from being released. The Stock Corporation Law requires every stock corporation to keep a stock book, and section 29 provides that “No transfer of stock shall be valid as against the corporation, its stockholders and creditors for any purpose, except to render the transferee liable for the debts of the — 595 — corporation according to the provisions of this chapter, until it shall have been entered in such book as required by this section, by an entry from and to whom transferred. Such latter book shall be presumptive evidence of the facts therein so stated in favor of the plaintiff, in any action or proceeding against such corporation or any of its officers, directors or stockholders.” The authorities have given full effect to this provision. (Johnson v. Underhill, 52 N. Y. 203; Shellington v. Howland, 53 id. 371; Powers v. Knapp, 71 Hun, 371, 377; Thomp. Corp. § 3284.) The following is from Shellington v. Howland (53 N. Y. supra),, at page 376 : “An entry upon the books of registry of stockholders is required for the protection of the company and its creditors, and each may hold the stockholders to their liability as such until they have divested themselves of the title to their shares by a completed transfer, as prescribed by law. No secret transfer will avail to release the stockholder from his obligations, or deprive the creditors of the corporation of the right to look to him as the responsible party liable for the debts of the corporation.” No stock was ever issued to the defendant Schmidt, and no stock book was ever kept, and these facts are urged to relieve him from this rule. He was responsible very largely for these conditions. He owned one-half the stock and was both director and president. The issuing of the stock certificates and the keeping of the stock books in compliance with the Stock Corporation Law rested with him. He cannot while in control violate the explicit mandates of the statute and then assert this violation in exoneration of himself from liability. The case differs from Chemical National Bank v. Colwell (132 N. Y. 250), as there the defendant was not responsible for the failure to procure the transfer book and the record in fact was made long before the debt in question was incurred. The whole facts surrounding this transaction tend to cast an imputation upon the good faith of the defendant Schmidt. He subscribed for a large block of this stock and was vigilant in the management of the company’s affairs. He sought by a secret agreement to obtain the stock substantially as a gratuity. Under his management there were no books from which creditors could obtain any light as to the ownership of the capital stock. The only information available to them was the certificate of incorporation which — 596 — indicated that Schmidt was the Iona ficle owner of one-half of its capital and this continued to be the sole source of information accessible to those dealing with the company even after the agreement between Schmidt and Laing. In a few months the corporation became insolvent. The defendant then assigned his stock to another stockholder, and two days later this transferee dumped it on the corporation. The conclusion seems clear that Laing was a man of straw to act as Schmidt’s medium to get his stock foisted on the company. In his agreement with Laing he released the corporation from any demands accruing to him against it, thus foreshadowing the assignment of Laing to the company. That Schmidt was liable for the outstanding debts is plain, and in view of the unsavory flavor of the transfer, I am satisfied he failed to terminate his relations with the corporation. Neither the collateral agreement nor the written transfer to Laing refers to the subscription contract. Within the strict letter of these papers we might say neither includes the stock accruing to Schmidt by virtue of his contract to take and pay for $10,000 par value of capital stock of this company. I am satisfied, however, that the intention of the parties was to embrace in each agreement the stock contract, and have so assumed in considering the case. The defendant Schmidt did not, in his answer, attack the judgment. He did not seek to have it reopened and his liability limited to that portion incurred prior to his attempted transfer, and it is doubtful if he is now in a position to claim he was relieved by his assignment in any event. There is no defense of defect of parties, and no claim now that the other stockholders should be brought in. The stipulation of the defendant Schmidt and the payment by him to a third party debar him from maintaining that undue advantage may be given to the plaintiff over other creditors of the corporation, and the judgment aims to guard their rights. The judgment should be affirmed, with costs. All concurred. ■Judgment affirmed, with costs.