Edwards v. Cleveland Dryer Co.

Mr. Justice Adams delivered the opinion of the court. Two questions of law are presented for decision: first, whether the judgment can be sustained under section 18 of chapter 32 of the statutes; second, whether it can be sustained against appellants as partners of the other defendants'in the action. Sections 16 and 18 are as follows: Section 16. “ If the indebtedness of any stock corporation shall exceed the amount of its capital stock, the directors and officers of such corporation, assenting thereto, shall be personally and individually liable for such excess, to the creditors of such corporation.” Section 18. “ If any person or persons being, or pretending to be, an officer or agent, or board of directors, of any stock corporation, or pretended stock corporation, shall assume to exercise corporate powers, or use the name of any such corporation, or pretended corporation, without complying with the provisions of this act (or) before all stock named in the articles of incorporation shall be subscribed in good faith, then they shall be jointly and severally liable for all debts and liabilities made by them, and contracted in the name of such corporation, or pretended corporation.” 1 Starr & Curtis, Oh. 32, Secs. 16 and 18. In Lewis et al. v. Montgomery, 145 Ill. 30, the court, commenting on section 16, say: “ In Wolverton v. Taylor, 132 Ill. 197, the statute sought to be invoked here was under consideration, and we there held that while the liability imposed is not penal but contractual, it is like that of a surety, and therefore strioti juris. This being the case, the statute should receive a construction in consonance with the nature of the obligation imposed. The words employed should be interpreted ■ according to their plain and obvious meaning, and should not be extended by construction so as to embrace cases not clearly within the terms of the statute. The - liability.is created only when the indebtedness of the corporation exceeds the amount of the capital stock, and is imposed only upon the directors and officers assenting to such excess of indebtedness. This plainly means assenting to its creation. Manifestly, a recognition of the indebtedness by the directors, after it has been so contracted as to become binding on the corporation, should not have the effect of charging them with this statutory liability. After the indebtedness. has been created by such agents and in such manner as to constitute it a valid obligation of the corporation, it becomes the duty of the directors to recognize its validity, and, so far as is in their power, provide for its payment.” The court further held that the assent of the directors or officers “ could only be given by some affirmative, voluntary act on their part, or at least some active participation or co-operation in the particular transaction out of which the indebtedness arose.” The court in the case cited not only held that section 16 should be strictly construed, but practically so .construed it, by holding that persons who were directors when indebtedness in excess of the amount of the capital stock of the company was created, but who did not, in fact, participate in the creation of such excessive indebtedness, could not be made liable. In Huntington v. Attrill, 146 U. S. 657, the question was presented whether the following section of a statute of the State of Hew York was a strictly penal law: “ If any certificate or report made, or public notice given by the officers of such corporation, shall be false in any material representation, all the officers who shall have signed the same shall be jointly and severally liable for all the debts of the corporation contracted while they were officers thereof.” The court, while holding that the statute was-not penal in the sense that it could not be enforced by the Federal courts, say: “ As the statute imposes a burdensome liability on the officers for their wrongful act, it may well be considered penal, in the sense that it should be strictly construed.” We think the decision of the court in Lewis v. Montgomery, supra, that section 16 must be construed strictly, is equally applicable to section 18, and that the latter section must be strictly construed, and creditors seeking a remedy under it must prove a case “ clearly within the terms ” of the section. ISTor can creditors of a de facto corporation, who have dealt with it as a corporation, rightfully complain of this, because, having so dealt with it, they could not, in the absence of the statute, be heard to deny its corporate existence, and could not hold its officers or agents contracting in its name personally liable. Bushnell v. Consolidated Ice Machine Co., 138 Ill. 67. Counsel for appellee contend that there was a mere joint enterprise of the stockholders, including appellants, under the name of the Thompson & Edwards Fertilizer Company, but we can not accede to this view. In the case last cited, the court say of the Ice Machine Company: “ From the facts set up in the bill, it clearly appears that there was an honest attempt by the incorporators to organize a corporation authorized by the laws of this State. It is shown by the bill that upon the issuing of that certificate its directors elected the proper officers and proceeded to the transaction of business as a corporation, and continued to act as such until the filing of this bill, a period of more than five years. That these facts establish a corporation defacto • is settled by numerous decisions of.this court,” citing numerous cases. The facts in evidence in the present case are substantially the same as said by the court to have been shown by the bill in the case cited, and in this case, as in that, the sole omission was the failure to file for record the certificate of complete organization. . Appellee’s counsel will hardly contend that the Fertilizer Company was not,, at least, a “ pretended stock corporation,” and the liability mentioned in section 18 is imposed upon the person or persons being or pretending to be an officer, agent or board of directors of any stock corporation, or “ pretended stock corporation.” And the .liability is that “they shall be jointly and severally liable for all debts and liabilities made by them, and contracted in the name of such corporation or pretended corporation.” Appellee’s counsel does not and, in view of the evidence, can not claim that appellants, Hoyt and Edwards, or either of them, in fact participated or co-operated in any way in the purchase from appellee, or in the execution of the notes given in settlement of that purchase, or even that they or either of them had any knowledge of either of those transactions at the times respectively when they occurred. Appellee’s counsel bases its right to recover solely on the facts that appellants were directors, and that appellant Hoyt was an officer, and there is nothing else in the record on which to base it. In Lewis v. Montgomery, supra, the court say : “The directors, though the governing body of the corporation, are only its officers and agents, and any subordinate agent appointed by them, or acting by virtue of their sufference or recognition, does not thereby become their agent, but the agent of the corporation. His acts are the acts of the corporation, so as to make it liable for debts or obligations incurred by him on its behalf, but they are not the acts of the directors, unless commanded or authorized by them.” The court further held, as heretofore stated, that the assent intended by section 16 “ could only be given by some affirmative, voluntary act on their part, or at least some active participation or co-operation in the particular transactions out of which that indebtedness arose.” By section 16 directors and officers are made liable for indebtedness in excess of the amount of the capital stock to which they assent, while by section 18, officers, agents and directors are made jointly and severally liable for all debts and liabilities made by them. The words “ made by them” in section 18 are certainly as strong as the words “ assenting thereto ” in section 16, and as we think, stronger, and if under section 16 some affirmative, voluntary act, or some active participation or co-operation in the particular transaction, is necessary to the incurring of liability, we can not- understand why at least the same should not be necessary under section 18. If the contention of appellee’s counsel is correct, that the mere fact that one is a director of a de facto corporation such as the Fertilizer Company, would make him personally liable under the statute for a debt contracted by another person, an agent of the corporation, then he would be liable, even though he voted against contracting the liability at a meeting of the board of directors. A construction from which such absurd and unjust consequence might logically follow, must be rejected as unsound. F. E. Barnard made the debt or liability in question, and not appellants or either of them. The liability was created when Barnard contracted with appellee. The Fertilizer Company received the material contracted for and used it in its business, and the - execution of the promissory notes in settlement of the liability previously created, was a mere recognition. of that liability, and not a violation of the statute. Lewis v. Montgomery, 145 Ill. 47. However, neither of the appellants knew of or had anything to do with the execution of the notes. The judgment can not be sustained against appellants as partners. The counts which proceed on the theory of partnership, charge the appellants and twelve other persons as partners. The suit was dismissed as to defendant Th ompson. Each of the appellants filed a plea denying joint liability with the other defendants, and also a plea denying partnership with the other defendants. These pleas were properly verified by affidavits, and cast on appellee the burden of proving joint liability of the defendants or partnership. Kennedy v. Hall, 68 Ill. 165; Smith v. Knight, 71 Ib. 148; Walker v. Wood, 170 Ib. 463. This appellee undertook to do by proving that the defendants were stockholders in the Fertilizer Company, but only succeeded in proving that eight of the thirteen defendants were stockholders when the liability in question was created. Appellee failed to prove partnership or joint liability of appellant with the other defendants. This renders unnecessary the discussion of the question whether the stockholders were, on the facts proven, liable as partners. The judgment will be reversed and the cause remanded.