Avery & Son v. McClure

Eletcher, L, delivered the opinion of the court. In 1904 there was organized and incorporated a corporation known as the Dodson Plow Company, domiciled at Columbus. •Some time later the corporate name was changed to the New South Plow Company and the capital stock was increased. The corporation found it necessary to borrow considerable sums of money aggregating some $35,000, from various banks in Columbus and Aberdeen, and to secure these sums executed deeds of trust on all its property for the benefit of the banks and of one Charles R. Smith, who was an accommodation indorser on certain of the company’s paper. It seems that the corporation virtually suspended operations after the execution of these trust deeds and may be said to be without assets and hopelessly insol — 180 — vent. In November, 1906, Avery & Son, a Kentucky corporation, exhibited its bill in the circuit court of the United States for the Northern District of Mississippi against the New-South Plow Company, averring in substance that the defendant company had infringed a patent owned by Avery & Son, and praying for an injunction against the further use of this patent and for an award of damages. No defense wras made to this suit, and in April, 1907, a pro confesso was taken and a final decree entered, making the injunction perpetual and awarding Avery & Son damages in the sum of $3,000. An execution was issued on this decree of the federal court and returned “nulla bona.” Thereupon in September, 1907, Avery & Son filed a bill in the chancery court of Lowmdes county against the stockholders and directors of the New South Plow Company, seeking to hold them liable for the $3,000 evidenced by the federal court judgment—the contention being-that the stockholders were liable under section 909 of the Code of 1906 “for the amount or any balance that may remain unpaid for the stock subscribed for by them;” further, that under section 923 of the Code the directors and stockholders wrcre liable for the amount of capital stock withdrawn and dividends declared while the company was insolvent; further, that the directors were liable under section 924 of the Code for debts contracted in excess of the amount of capital stock. Defendants filed their plea, setting up the fact that the demand of Avery & Son was based upon a judgment for infringement of patent and was not such a debt as the statute contemplated. This plea was held good by the court below and the bill dismissed. This appeal, therefore, presents the single question whether damages awarded for the infringement of a patent fall within the meaning of our statutes making directors and stockholders liable under certain circumstances for the debts of the corporation. There can be no doubt that the infringement of a patent is a tort: 16 Ency. Pl. & Pr. 79. It is argued, howevex-, that, though this be an action ex delicto, yet the tort may be waived, — 181 — and the wrong treated, as having arisen from the breach of an implied contract; and in support of this contention Evans v. Miller, 58 Miss. 120, 38 Am. Rep. 313, and Miller v. Wesson, 58 Miss. 831, are cited. Both these cases deal with the recovery of the value of trees cut from the plaintiff’s land and by the defendant converted to his use. The precise holding is thus stated in the Evans case: “The action of assumpsit can be maintained, though there was no actual conversion of the trees into money. It is held by many courts of high authority that a tort can only be .waived, and an action ex contractu maintained, where the tortfeasor has converted into money the proceeds of his wrongful act, and has thus subjected himself to an action for money had and received. An intimation of this sort "was thrown out in O'Conley v. City of Natchez, 1 Smedes & M. 46, 40 Am. Dec. 87, and again in Mhoon v. Greenfield, 52 Miss. 440, and certainly it is supported by many adjudicated eases in England and America. A more liberal, and we think a more sensible, rule is laid down by the later test-writers, and sustained by many courts, to the effect that the tort may be waived and assumpsit maintained whenever the property taken has been converted either into money or into any other beneficial use by the wrongdoer, and especially where it has been so applied to his use as to lose its identity. Cooley on Torts, 95, and cases cited; 2 Greenl. on Evidence, § 108, note 5; 1 Hill on Torts, 42; note ‘a.’ “It is impossible to perceive any valid objection to this doctrine. So long as the trespasser retains, in its original shape, the property taken, he may logically deny that he holds it under a contract, and demand that he be proceeded against in tort, and that the tort be established against him; but when he has parted with it, either for money or other property, or when he has mingled it in its use, or changed its form, he should not be permitted to deny the assumption to pay its value-.which the law imputes from his method of dealing with it.” This is all that is held in these cases, and certainly no warrant can here be found for abolishing all distinctions between actions ex delicio and ex — 182 — contractu. The true basis of the perfectly correct holding in these cases is thus stated by the supreme court of Massachusetts: “It is a -well-known rule that, if property ha§ been .wrongfully converted and sold, the owner may .waive the tort and sue for the money; but the foundation of the action is a tort for which trespass or case would lie, and the action proceeds, not on the ground of a contract, but of an equitable obligation to pay over the proceeds of the sale. Jones v. Hoar, 5 Pick. (Mass.) 285; Bigelow v. Jones, 10 Pick. (Mass.) 161. Child v. Boston & Fairhaven Iron Works, 137 Mass. 516, 50 Am. Rep. 328. We think there can be no real dissent from the conclusion that an infringement of a patent is a tort, and that there can be no recovery upon the theory that the damages were awarded for any breach of an implied contract. The question before us is, therefore, broadly, whether the'term '“debts,” as used in our statute, can be held to include damages awarded for the commission of torts. It should be remembered that wre must look to our statutes, and to our statutes alone, in determining this question of liability; for at common law the stockholders were not liable for any of the obligations of a corporation, whatever their character and in whatever manner incurred. Terry v. Little, 101 U. S. 216, 25 L. Ed. 864. It is necessary, therefore, to give careful scrutiny to the exact terms of the statute. Section 909 provides: “In all corporations each stockholder shall be individually liable for the debts of the corporation contracted during his ownership of stock, for the amount of any balance that may remain unpaid for the stock subscribed for by him, and may be sued by any creditor of the corporation; and such liability shall continue for one year after the sale or transfer of the stock. The stock in all corporations shall be transfei*able by the indorsement and delivery of the stock certificate and the registry of such transfer in the books of the corporation.” Section 923 provides: “No part of the capital stock in any corporation shall be withdrawn or diverted from its purpose, nor a dividend declared, when the company is insolvent, or would be — 183 — rendered insolvent by such withdrawal or the payment of such •dividend; and the directors who assented to such withdrawal, or declared and paid such dividend, as well as the stockholders who received it, shall be jointly and severally liable to creditors whose debts then existed, to the extend of such withdrawal or dividend and interest.” Section 924 provides: “The amount of debts which any trading corporation or company may contract or owe shall not exceed the amount of its capital stock paid in; and in case the debts exceed that amount, the directors who contracted such debts shall be individually liable for the excess over the amount of capital stock, and may be sued therefor by any creditor, whether the debt be due at the time of suit brought or not, if such creditor was without notice or knowledge of the excess at the time his debt was made.” It will thus be seen that the statute speaks of “debts contracted” and “debts existing,” and for the payment of these obligations the directors and stockholders are liable. These being the terms employed, we are not left without guidance in the authorities. The rule is thus stated by Beach: “The 'debts’ of a corporation, for which its members are made liable by statute, are such claims against it as arise from contract, and do not include a judgment against the company for tort, even through the tortious act might have been considered a breach of contract, nor costs in such action.” Beach on Brivate Corporations, § 151. To the same effect is another approved authority: “The statutory liability imposed upon the stockholders in corporations is a liability exclusively for debts and demands accruing against the corporation by reason of its contracts. It cannot, therefore, be enforced to pay damages recovered against the corporation in an action in tort.” 1 Cook on Corporations, § 217. One of the earliest and most emphatic cases on the subject is Heacock v. Sherman, 14 Wend. (N. Y.) 58, construing and applying a statute much more comprehensive than our own. It is there said: “The eighth section of the act incorporating the — 184 — Buffalo Hydraulic Association (St. 1827, p. 45) enacts: ‘That the stockholders of the said corporation shall be holden jointly and severally to the nominal amount of their stock, for the payment of all debts contracted by the said corporation, or by their agents; and any person or persons having any demand against the said corporation may sue any stockholder or stockholders, in any court having cognizance' thereof, and recover the same with costs; provided that no stockholder shall be obliged to pay more in the whole than the amount of tire stock he may hold in the said company at the time the debt accrued.’ The term ‘demand’ is undoubtedly broad enough, if it stood alone, to embrace the claim of the plaintiff. It is a word of the most extensive signification that can be used in a release, and operates to dischai-ge the release Horn every eaxise of action existing at the time in favor of the party executing it. We must, however, look at the whole section, and the connection in which it stands, in order to fix its meaning in this case. The stockholders, in the first place, are made jointly and severally holden for the payment of all debts contracted by the corporation or by their agents. The liability is here declared. It is new, and unknown to the common law, and is in terms limited to demands ex contractu,. The residue of the section was not intended to extend the liability thus declared, but is in furtherance of the remedy. Without it, it might be a question whether, under the first-clause, a party would be bound to sue all the stockholders, or but one of them, agreeably to the rule of law respecting joint and several obligors. 1 Chitty’s Pl. 30; 5 Bacon, tit. ‘Obligation,’ D, 4. But the proviso to the section is conclusive upon the point. Any -person having a demand against the corporation is authorized to sue any stockholder, in any court, etc., ‘provided that no stockholder shall be obliged to pay more, in the whole, than the amount of the stock he may hold in said company at the time the debt accrued’—thereby clearly qualifying the enlarged meaning of the word ‘demand,’ and showing, satisfactorily, that it was used by the legislature to denote a demand arising upon contract. Damage arising upon tort is not a debt — 185 — ■accrued, within any reasonable construction of that term. It is apparent, as well from a view of the whole section as from an analysis of its parts, that the intent of the framers of it was •only to make the stockholders individually responsible for the debts of the company.” This was quoted with approval, and indeed, made the basis ■of decision, by the supreme court of the United States in Chase v. Curtiss, 113 U. S. 452, 5 Sup. Ct. 554, 28 L. Ed. 1038. In that case Justice Matthews, in referring to a contention which is here made that the demand, when reduced to judgment, becomes a debt within the meaning of the statutes on the subject, says : “But, if this proves anything, it proves too much, and, instead of showing the thing to be proved, that the judgment is conclusive evidence of a debt, it establishes, on the contrary, that a liability on the part of the corporation for a tort, though after-wards reduced to judgment against it, is not a debt of the corporation, even .when in judgment, within the meaning of the statute imposing upon the trustees the penalty sought to be enforced in this action for not making and publishing an annual report showing, among other things, the amount of its existing debts. Eor, keeping in view the statement now urged by counsel of the impossibility, in advance of liquidation by the verdict of •a jury, of even approximately, much less accurately, stating the amount of such a liability, can it be supposed that the duty to do so is developed upon the trustees within either the letter or spirit of this statute, under penalty of becoming personally liable to pay whatever judgment may be thereafter rendered on account thereof against the corporation? Surely not. Such •claims are not within the contemplation of the act. The mischief to be prevented by its requirements has no relation to liabilities of that description. The creditors to be protected are those only who become such by voluntary transactions, in reference to which, for their benefit, the information becomes^ important as to the debts of the company.” The issues and contentions here involved were made the sub — 186 — jcct of a eareful review by the supreme court of Missouri in Cable v. McCune, 26 Mo. 371, 72 Am. Dec. 214. It is there said: “The question, however, here is, What class of demands is embraced within the words ‘debts contracted ?’ Our legislature did not go the length which others have in fixing the liabilities of the stockholders of these manufacturing corporations. They did not enact, as in many other states it is enacted, that the stockholders should be responsible for every liability established against the corporation and which its assets turned out insufficient to meet. Such statutes as these, creating a general and determined liability, not dependent on circumstances, becoming as it were a part of the very essence of the charter, may reasonably admit of a very different construction from the law which seems to recognize the general principle of individual irresponsibility, subject to a very limited exception, and only ventures to hold out such responsibility as a penalty for a failure on the part of its managers to perform certain acts directed in the law, and supposed to furnish some advantages to the public. The statute, which Judge Story construed in Carver v. Braintree Mfg. Company, 2 Story, 432, Fed. Cas. No. 2,485, was of this remedial character. That act declared that every member of the manufacturing company named should be liable in his individual capacity for all debts contracted whilst he was a member. There was no penalty for an omission or a commission. It was simply a recognition of the individual liability principle on the face of the charter. Called upon to construe such a charter, Judge Story held it to be remedial, not penal, and, so viewing it, he gave the word ‘debt,’ which was the term used, a very liberal and extensive signification, to forward the manifest purposes of the law and the interest of society. “Had our legislature taken the same step and boldly inserted such a provision in all their charters of this class of corporations, Judge Story’s views, forcible and reasonable as they are, ought to have great weight in determining the construction of — 187 — such a statute. Judge Story concedes that the interpretation he gives to the word ‘debt’ is a very loose one, and, in short, is making it synonymous with ‘demand.’ He substituted for the words ‘debts contracted’ the phrase ‘dues owing* or ‘liabilities incurred,’ regarding them as essentially equivalent expressions. The result was that a demand founded on tort was equally within the meaning of the act with a debt, liquidated or unliquidated. We do not feel ourselves authorized, upon well-settled-and long-established principles, to take this liberal view of the word ‘debts’ when used in our statute. Although the language is the same in the two statutes, ours is manifestly highly penal in its nature, whilst the Massachusetts act was considered by Judge Story as a remedial one. The demand sought to be enforced in the present action is certainly not a debt in the legal acceptance of the term, and it is, to say the least, doubtful whether it could be so regarded in its popular acceptation. The defendants are entitled to the benefit of such doubts. The popular meaning of a term may very properly he resorted to in ascertaining its construction in a purely remedial statute, and the plain objects of such laws ought not to be defeated by a narrow and technical definition. Unfortunately there are some words—and this word ‘debt’ is perhaps one of them—the popular meaning of which is unsettled and fluctuating, and hard to be ascertained. Where there is room for doubt, and the statute is penal, the safer rule is to adhere to that limited and definite sense to which long-established legal usage has restricted it. “The liability of the St. Louis Marine Railway & Dock Company to the plaintiffs was not a ‘debt’ within the legal acceptation of that term, as declared by Blackstone and other writers of established authority. It was not ‘a sum of money due by certain and express agreement.’ Whether the suit against the company which resulted in the judgment sought to be enforced against tlm defendant was one which would properly fall within the class of actions considered as founded on contract, or in that class which is based upon tort, is a more difficult question to de — 188 — termine, if it was important that it should be determined at all. In the division of actions made by Blackstone, it would probably be considered as founded on contract; for his definition of actions upon implied contracts is comprehensive enough to embrace almost every action on the case, exept slander, libel, assault and battery, and similar actions. In his sixth subdivision of actions upon implied contracts, Blackstone includes a variety of actions for what he terms breaches of implied duty or trust, which would comprehend almost every case of damage imaginable. This court, upon previous occasions, have treated actions like the present as substantially founded on tort, although a breach of contract is stated as inducement to the action. Acks v. Ball, 14 Mo. 396; McDonald v. Forsyth, 13 Mo. 549. So, in New York, Judge Nelson, in the case of Heacock v. Sherman, 11 Wend. 58, considered the action as one for damages upon a tort, and not arising upon contract, although, upon Blackstone’s division of actions, that case, which was for the loss of a horse by reason of the failure of a corporation to keep a bridge in repair, might very well have been considered as an action for damages arising out of contract. There was an implied contract that the company should keep the bridge in repair, and by reason of their failure to comply with their obligations the damage resulted, and in this way the case might be said remotely to' be founded on contract. But the real gist of the action, in that case as in this, was a tort, namely, the negligence and misfeasance of the corporation’s agents, and the insufficiency of the bridge in the one case and of the dock in the other, by which the damage complained of was sustained. Such damages can hardly, in popular acceptation, be regarded as debts. Certainly it is by no means clear that the legislature meant to embrace such demands. “We regret that in the examination of this subject Ave have been without any precedent to guide us. The only case directly in point is the one cited from Massachusetts (Milldam Foundry v. Hovey, 21 Pick. 417), and that is undoubtedly against — 189 — the conclusion to which we have arrived. An opinion of a court of such acknowledged ability as the supreme court of Massachusetts is entitled to great respect, but the circumstances under .which that opinion was delivered detract somewhat from its importance as authority. The question arose incidentally upon the exclusion of a witness, and it would seem, fro-m the curt manner-in .which the court disposed of it, that not much importance was-attached to its decision. No investigation was made into the matter upon principle or authority, and it is easily inferred, from a perusal of the case, which turned principally upon other points, that the question here considered was entirely a subordinate one, and its decision either way probably had no material influence upon the result. The statute under which the question arose Nseems to have differed from ours in the use of the word ‘contracts,’ as well as ‘debts,’ although the court did not, so far as I can perceive, attach any particular importance to this word. Under these circumstances, the case, as a mere precedent, does not appear entitled to great weight, notwithstanding the respectability of the court .which decided it. Ou the other hand, the case of Heacock v. Sherman, 14 Wend. (N. Y.) 58, is an authority, not only directly in variance with the decision of the supreme court of Massachusetts, but also entirely irreconcilable with Judge Story’s views in Carver v. Braintree Mfg. Company, 2 Story, 432, Fed. Cas. No. 2,485. Judge Nelson, who delivered the opinion of the court in that case refused to give a construction to the words ‘debts contracted’ that would embrace a demand for damages in an action founded on a tort. The other authorities referred to in the argument of this case are upon statutes essentially different from the one now under consideration.” We have thus set out these views at some length, for the obvious reason that they contain what we conceive to be the true theory upon all the propositions involved in this case. The opinion distinguishes, and distinctly limits, if it does not wholly disregard, the case of Carver v. Braintree Mfg. Company, 2 — 190 — Story, 432, Fed. Cas. No. 2,485, a case which may be said to be the foundation of the theory that individual stockholders under statutes similar to ours can ever be held personally liable for the torts of the corporation. This opinion of Judge Story, however, gives us less concern, since its doctrine has been expressly repudiated by the Massachusetts court itself, as will be seen from the opinion in Child v. Boston & Fairbanks Iron Works, 137 Mass. 516, 50 Am. Rep. 328, in which it is said that Judge Story’s decision stands unsupported by any direct authority, either before or since. This last-cited case is of especial value, since it was a case of damages arising from the infringement of a patent, which demand was held to arise ex delicto, and therefore not to be considered as a “debt contracted by the corporation.” It is true that in volume 23 of the first edition of the American and English Encyclopedia of Law, at page 870, occurs a statement that there is a conflict of authority as to whether the term “debts” includes claims for damages arising from torts, and also true that a table of cases is appended which are said to support the affirmative of this proposition. But an examination of these cases will show that a majority of them are positive and emphatic authorities for the opposing view. In this list are included Chase v. Curtis, Cable v. McCune, Child v. Washburn Iron Works, and Heacock v. Sherman, all of which have been noted above as supporting the conclusions reached in this opinion. A careful examination of the entire list shows that practically all these decisions fail to support the statement in the note. The second edition of this work states correctly that unliquidated damages arising from the commission of a tort-by the corporation or its agents are usually held not to be “debts,” within the meaning of that term as used in the statutes imposing liability upon stockholders. 26 Am. & Eng. Ency. of Law (2d ed.), 1024, 1025. These authorities not only settle the proposition as to the non-liability of the stockholders for damages arising from tort, but many of these cases further consider the contention that the — 191 — status of the claim is affected by the fact that the claim has been reduced to judgment. All of these authorities agree that the reduction of these claims to judgment does not change the nature of the demand, nor serve to extend the scope and significance of the term “debts,” as this word is employed in the' statutes. On principle we are in hearty accord with the reasoning and conclusions of these decisions. It seems to us an impossible view’ that the legislature ever intended to hold stockholders liable for any demands other than those growing out of the contractual relations between the corporation and its creditors. These statutes proceed upon the theory that any one extending credit to the corporation has a right to presume conclusively that the stock subscribed has been fully paid in, that the capital stock of an insolvent concern shall not be distributed in dividends^ and that the corporation shall not contract debts in excess of its capital stock. As to these matters the directors and stockholders are held liable; but it surely never was intended that the consequences of tortious conduct on the part of the corporation or its agent should be visited upon the stockholders. Such demands are necessarily unliquidated, and no corporation would be warranted in declaring dividends, since it would be impossible to say with certainty that a judgment for tort might not arise which would render the corporation insolvent. The word “debts” should be construed according to its common and usually understood significance, and so construing it, we think the learned court below correctly denied its application to a judgment for tort. Affirmed.