Mosler Safe Co. v. Guardian Trust Co.

Miller, J. : This action is brought by the plaintiff, a judgment creditor of a safe deposit company, on behalf of itself and others similarly situated, to enforce the personal liability of stockholders under section 303 of the Banking Law (Consol. Laws, chap. 2; Laws of 1909, chap. 10). We have examined all of the questions presented by the different briefs. I shall discuss only the principal points, stating under each head the pertinent facts. 1. A defendant, who owned fifty shares, was served, appeared — 120 — and answered but died in the State of New Jersey during the pendency of the action and no personal representative in this State was appointed. Another in whose name forty-five shares stood at the time of the commencement of the action had died prior thereto, and it does not appear whether he had any personal representatives or, if so, that they were within the jurisdiction of the court. Other defendants, named but not served, who together owned thirty-three shares, became stockholders after the plaintiff’s debt was contracted. Their assignors were served. Others, who together owned thirty shares, were named but not'served. There were one thousand shares in all. In some cases, both the transferor and the transferee of shares were named as defendants and served, so that there are defendants in court whose total liability is measured by one thousand three hundred and sixty-one shares. A motion was made to strike the case from the calendar on the ground that all the defendants had not been served, but it was not shown that any not served were within the jurisdiction of the court. Prior to the commencement of the action .the Superintendent of Banks had taken possession of the property of the corporation pursuant to section 19 of the Banking Law. (Since amd. by Laws of 1910, chap. 452.) The plaintiff made a demand upon him that he bring the action, which he declined to do, whereupon the action was brought in equity against the corporation, the stockholders, as hereinbefore stated, and the Superintendent of Banks. The complaint demanded that an account of the debts and liabilities of the corporation be stated; that its assets be sold and distributed through the medium of said Superintendent as liquidating agent, and that the defendant stockholders be adjudged jointly and severally personally liable to an amount equal to the par value of the respective shares held by them. None of the defendants asked for affirmative relief against their codefendants, or for an adjustment of the equities as between themselves. The appellants rely on Warth v. Moore Blind Stitcher & Overseamer Co. (146 App. Div. 28). But that case is distinguishable in two important respects. The suit was in equity to enforce the personal liability of stockholders for unpaid subscriptions under section 56 of the Stock Corporation Law — 121 — (Consol. Laws, chap. 59; Laws of 1909, chap. 61), which re-enacted section 54 of the former Stock Corporation Law (Gen. Laws, chap. 36; Laws of 1892, chap. 688), as amended by chapter 354 of the Laws of 1901, and which, as far as material, provided: “ Every holder of capital stock not fully paid, in any stock corporation, shall be personally hable to its creditors to an amount equal to the amount unpaid on the stock held by him for debts of the corporation contracted while such stock was held by him.” It seems that, unlike earlier statutes on the subject, that provision was intended to create an equal and ratable liability. (See Lang v. Lutz, 180 N. Y. 254; Ford v. Chase, 118 App. Div. 605; affd., 189 N.. Y. 504.) The stockholders’ liability under that statute was “to the amount unpaid on the stock held by him,” a liability which existed at common law and which could be enforced by a creditor by a suit in equity, in the interest of all creditors against the corporation and all stockholders, and the decision of this court was put upon the ground that the plaintiff had elected to pursue that remedy. ■ Said section 303 of the Banking Law provides: “ The stockholders of every such corporation shall be jointly and severally liable for all debts that may be due and owing by it to an amount equal to the par value of their stock in such corporation over and above such stock, to be recovered of the stockholders who were such when the debt was contracted or the loss or damage sustained, or of any subsequent stockholder. ” There is a marked distinction between that section and sections 71 and .196, defining the liability of stockholders of banks and trust companies, respectively, the liability in the latter cases being “equally and ratably,” not “jointly and severally,” as was the liability imposed by the statute considered hi Lang v. Lutz (supra), in which the Court of Appeals distinctly held that a creditor might sue one or all or any number of stockholders. The fact that the suit is in equity does not alter the case. The liability sought to be enforced was secondary to that of the corporation whose assets were in the hands of the Superintendent of Banks. It was proper for the plaintiff to come into equity to have an account of the liabilities of the corporation and a distribution of its assets in order to determine the — 122 — amount of his debt for which the stockholders should be made answerable. That amount being determined, their liability to answer for it to the amount of the par value of the stock, held by each respectively, is joint and several. Had they asked for affirmative relief against their codefendants or against stockholders, not made defendants, they would doubtless have been afforded an opportunity, had they sought it, to bring in all stockholders. But it was not for the plaintiff, unless he saw fit, to do that for them. 2. The objection to a joint and several judgment has already been answered. The judgment contains a provision under which any stockholder may move at the foot of the judgment for contribution. The plaintiff was not.bound to incorporate such a provision in the judgment. He is entitled to collect his judgment from whomsoever he may, and of course the right of a defendant to contribution from his codefendants will arise only when he shall have paid more than his pro rata share, which is a mere matter of computation. 3. A number of stockholders loaned money to the corporation, as the referee found, “ to pay the ordinary current expenses of the company. ” Those loans were made mostly in 1906 and 1901, though there was one loan in 1909 and a few in 1908. All but one accepted in satisfaction of their claims in whole or in part debenture bonds of the company, dated July 1, 1901, and by their terms payable on July 1, 1931. None of them brought actions on the claims, not thus satisfied, within two years after they were due. The referee found, and the final judgment adjudged, that “no creditors, other than the Hosier Safe Company, are entitled to enforce the ' personal liability of the defendant stockholders or any of them.” None of the defendants, except one, joined in the plaintiff’s demand to enforce the liability of stockholders, and his notice of appeal- expressly excepted the provision of the final judgment above quoted. No one denies, indeed all assume, that section 59 of the'Stock Corporation Law applies. We may, therefore, start with the proposition as established that none of the defendants is in a position to enforce the liability of stockholders or is entitled to-share in the fund arising from such enforcement* . The judgment, however, adjudges that the defendants who are creditors — 123 — are entitled to an offset against their individual liability to the ■ face amount of their claims. They have also been allowed their distributive share of the assets of the corporation, over half of which arose from contributions by other stockholders made after the commencement of this action, as hereinafter stated. While. the plaintiff does not appeal, other appellants are aggrieved because their right to contribution, in case they are required to pay more than their pro rata share, is thus cut down. It is necessary to keep clearly in mind the basis upon which the right of setoff rests, and to understand, in examining the cases, the particular statute under which each arose. Briggs v. Penniman (8 Cow. 387) was a suit in equity to enforce the liability of stockholders of a manufacturing corporation under section 7 of chapter 67 of the Laws of 1811 (1 R. L. 247, § 7) which provided that the persons composing the company should be individually responsible to the extent of then respective shares for all debts due and owing by the company at the time of its dissolution. That case decided that stockholders, who were creditors and entitled to claim. under the act, stood on the same ground as creditors, not stockholders, and that, if the fund produced by the enforcement of the stockholders’ liability was not sufficient to pay all, they were entitled to share equally on the principle that equality is equity. In Bank of Poughkeepsie v. Ibbotson (24 Wend. 473), which arose under the same provision of law, it was decided that the liability was several; that an action at law would lie, and it was said that the defense of the stockholders “ is as perfect at law as in equity.” Garrison v. Howe (17 hi. Y. 458) was an action at law under the Manufacturing Act of 1848 (Chap. 40) to enforce the liability of a stockholder to the amount of his stock for a debt incurred before the capital stock was paid up, and it was decided that it was a complete defense to show that the defendant had already paid on account of the debts of the corporation a sum equal to the liability imposed by the statute; this, for the reason that, in such an action, the defendant could not have an account. That case was followed by Matter of Empire City Bank (18 N. Y. 199), which was a special proceeding under the statute (Laws of 1849, chap. 226) to wind up the affairs of the Empire City Bank. — 124 — The liability imposed was joint and ratable to all the creditors of the bank, and it was decided that in a proceeding in which an account of the debts and effects of the corporation could be had, a stockholder could not set off the indebtedness of the bank to him against his liability as stockholder, but that as a creditor he was entitled only to his pro rata share of the fund. It is to be observed that in all of the foregoing cases the stockholder was, as a creditor, entitled to enforce the liability of stockholders for the debts of the corporation. The last case was cited without elaboration as authority for the proposition that in an action in equity to enforce the statutory liability of stockholders of a bank, a defendant was not entitled to offset an indebtedness due him from the bank" against his liability as stockholder for its debts.. (Barnes v. Arnold, 45 App. Div. 314, 323; affd. on opinion below, 169 N. Y. 611.) In Mathez v. Neidig (72 N. Y. 100), which was an action at law to enforce the individual liability' of a stockholder under the General Manufacturing Law (Laws of 1848, chap. 40) it was held that a stockholder, who was also a creditor to an amount equal to his stock, was entitled tó offset his claim as creditor against his liability as stockholder. . Said act :(§ 10) made all stockholders severally and individually liable to creditors to an amount equal to the amount of stock held by them respectively for all debts of the company until the whole amount of capital stock had been paid in. The court put its decision on the ground, not that the defendant had made out the defense of payment, as where a stockholder voluntarily or on compulsion pays debts of the corporation for which he is liable, but that, as a creditor, the defendant had an interest in the fund as well as the plaintiff, because his debt was one for the payment of which stockholders were individually liable. In the course of the opinion, Church, Ch. J., said: “It is also urged that to enable a defendant to interpose this defense, he must bring himself within the provisions of the twenty-fourth section of the act, limiting personal liability to debts which are to be paid within one year, and requiring a suit to be brought against the company within one. year. This section has no application. ” That statement is. the principal support, as far as authority in this State is concerned, to sustain the part — 125 — of the judgment under consideration. That case is distinguishable from this in that that was an action at law, whereas this is a suit in equity, and Barnes v. Arnold {supra) is a latei authority for the proposition that in a suit in equity a stockholder is not entitled to offset an- indebtedness of the corpo ration to bim against his individual liability as stockholder. The basis of the liability in that case is also somewhat different than in this. The liability in that case was imposed for failure to have the capital stock paid in. It was to supply a deficiency in the capital, intended to be a trust fund for the payment of creditors. If the capital had all been paid in, there would have been no liability. Hence, it might be urged that, within the purview of the statute, a stockholder, who had contributed to the corporation, in addition to his subscription, a sum equal to the amount of .his stock, should in law be entitled to an offset. As a creditor, he was entitled to share in the assets, though not in the fund created by the enforcement of stockholders’ liability, and he was entitled to apply his dividend in reduction of his liability; but in an action at law he could not have an account. In this case the statute provides for the individual liability of stockholders directly to creditors, not to supply a deficiency of capital, but in addition thereto. I own that the distinction is rather nice. But from the standpoint of authority Barnes v. Arnold {supra) is controlling. A distinction must be made between payment as a defense and an equitable setoff. Each stockholder is liable only to the amount of his stock and can only be required to discharge his obligation once. If he pays a debt of the corporation for which the- liability is imposed, whether voluntarily or under compulsion, he thereby discharges his obligation and when sued may set up the. payment as a defense. But when he stands merely in the position of a creditor, his right to a setoff must depend upon his right to share in the fund arising from the enforcement of the stockholders’ liability. If he is entitled to share in that fund, his defense to an action at law is good, because an account cannot be had. But in an action in equity, ' all in the same class are to be treated alike. A stockholder is * chargeable with the full amount of his liability as such and is entitled as a creditor to his pro rata share of the fund arising — 126 — from the enforcement of the liability of stockholders, and of course he may offset his dividend against his liability. If he is hot entitled to share in the. fund by reason of not being in a position to enforce the liability of stockholders, then of course he can receive no dividend from the fund and has nothing to offset against his liability. This conclusion conforms to the well-settled rule that, in equity, setoff can be allowed only as between claims in the same right or interest. A claim against the corporation does not exist in the same right or interest as a claim against a statutory fund arising from the enforcement of stockholders’ liability. The stockholders’ liability is to creditors, not to the corporation, not. to all creditors but only to those within prescribed conditions. (Pfohl v. Simpson, 74 N. Y. 137; Farnsworth v. Wood, 91 id. 308.) But it is said that it is to be inferred from the mere loan of the money to the corporation that it was used to pay debts, for which Agate v. Sands (73 N. Y. 620) is cited. It is to be observed that the point was not decided in that - case. The finding in this case is that the money advanced to the corporation was used to pay current expenses. There is no proof in the case for what specific purpose it was used, and we do not think that a loan of money by a stockholder to a corporation to meet current expenses imports that it is to be used to pay debts for which the stockholder is personally liable. 4. On the 6th day of August, 1909, as the interlocutory decision reads, the Bank Superintendent “ took possession of the property and business of the said Safe Deposit Gompany as a delinquent corporation, and has ever since continued in and still is in such possession for the, purpose of liquidating and distributing its property under the provisions, of said Act.” In October, 1909, this suit was brought, and one of the prayers for relief was, as stated, that the assets be distributed through the medium of the Superintendent as liquidating agent. On the 3d of December, 1909, the Superintendent required the corporation, pursuant to section 17 of the Banking Law, to make good an impairment of capital to the extent of $56,000, and pursuant to that, a notice of assessment of fifty-six per cent was sent to all of the stockholders, part of whom paid the assessment, thereby creating a fund of over $23,000, which, — 127 — together with the sum of $20,100, realized on the sale of the company’s assets, constitutes the fund in the hands of the Bank Superintendent, which he is directed by the judgment to distribute among the creditors of the corporation, including the stockholders referred to in the preceding point, making a dividend of forty-five and forty-five one-hundredths per cent. The stockholders, who thus paid their assessments, asked to be allowed an offset to that amount, which was denied. It is plain that a requirement that an impairment of capital shall be made good, pursuant to said section 17, is for the purpose of enabling the corporation to resume business. Such a requirement can doubtless be made although the Superintendent has taken possession under section 19, because, after taking possession, the Superintendent may allow the corporation to resume business or he may liquidate its affairs. . But it is plain that the Superintendent has no authority to require an assessment to be made for the purpose of swelling the assets to he distributed on a liquidation. In case of a liquidation, the liability of stockholders is determined by said section 303, and they cannot be required both to contribute to a fund to be distributed by a liquidator, and to answer as stockholders for then.' individual liability. Now, in this case, if it is to be assumed, notwithstanding the finding last above quoted, that the purpose of the Superintendent in requiring the impairment of capital to be made good was to enable the corporation tp resume, then that purpose was defeated, and the consideration to the stockholders for their advances failed. The money contributed went, not to the corporation to make good an impairment of - capital to enable it to resume, but to a liquidator, who has been ordered to distribute it among the creditors. If substance rather than form, fact rather than fiction, is to govern, the contribution was not to capital but to the creditors, and it seems to me that it is inequitable to deny any credit to those who made the contribution, and in the same judgment to direct the distribution of the sum contributed among the creditors. The money not having.been used for the purposes for which it was contributed and being still in court, or what is tantamount to the same thing, in the hands of the liquidator, who takes the place of the court’s receiver, there is no reason — 128 — why it should not he applied as justice and the equities of the case require, and that is in reduction pro tanto of the liabilities as stockholders of those who contributed it: Reliance is placed upon the case of Delano v. Butler (118 U. S. 634), but that case is plainly distinguishable from this in that the assessments Were in fact, and not in form, paid as a contribution to capital to enable the corporation to resume business, and it did in fact resume and the money raised by the assessment was used by it, and was not distributed among the creditors as the judgment in this case provides shall be done. The conclusion of the opinion, delivered by Mr. Justice Matthews in that case, suggests that, if it had appeared that the fund had been distributed ratably, a different question would have been presented. Much might be said in support of the proposition that the stockholders who paid their assessments in this case were entitled to a return of the money or at least to have it applied upon debts for which they were individually liable, and then to look to the other stockholders for contribution. But they do not complain of a ratable distribution among all the creditors, and are at least entitled to offset against their liability as stockholders the sums' contributed by them respectively. The judgment should be modified in the two respects pointed out, and, as thus modified, affirmed. Ingraham, P. J., Clarke, Scott and Dowling, JJ., concurred. .