McClaren v. Franciscus

Wagner, Judge, delivered the-opinion of the court: Plaintiffs recovered judgment against the “ St. Louis Museum, Opera, and Fine-Art Gallery,” a corporation duly incorporated by the laws of this State under the statutory provision entitled “ private corporations.” Execution was issued on said judgment and returned unsatisfied, whereupon plaintiffs moved that an execution issue against the defendant, Franciscus, he being at the time a stockholder of the said corporation. This motion was sustained, and the defendant appealed. It appears from the record that at the time the debt was contracted Franciscus was not a shareholder in the corporation, but became so subsequently, and was and continued to be one up to the time the execution was issued and returned, under circumstances which will be hereafter referred to. The principal question, therefore, is whether the individual liability of the stockholder, imposed by the constitution and the law, attaches at the time the debt is created or at the time the execution is sued out. Individual-liability clauses in acts of incorporation are of no unusual occurrence, and they exist in England and in most of the States of this Union. The law under which this proceeding was had was framed in’ obedience to a positive requirement of the constitution, and is now to be construed for the first time as regards the liability of different stockholders. By section 6, article YIU, of the constitution, it is provided that dues from private corporations shall be secured by such, means as may be prescribed by law, but in all cases each stockholder shall be individually liable, over and above the stock by him or her 'owned and any amount unpaid thereon, in a further sum at least equal in amount to such stock. By General Statutes 1865, p. 328, § 11, it is enacted: “If any execution shall — 463 — have been issued against the property or effects of a corporation, and if there cannot be found whereon to levy such execution, then such execution may be issued against any of the stockholders, to an extent equal in amount to the amount of stock by him or her owned, together with any amount unpaid thereon: provided, always, that no execution shall issue against any stockholder except upon an order of the court in which the action, suit, or other proceeding shall have been brought or instituted, made upon motion in open court, after sufficient notice in writing to the persons sought to be charged; and upon such motion such court may order execution to issue accordingly.” ' Section 12 makes it the duty of every clerk or other officer having charge of the books of any corporation, on demand of any officer holding any execution against the same, to furnish the officer with the name, place of residence (so far as to him known), and the amount of liability, of every person liable as aforesaid. The language employed in the constitution and the eleventh section of the statute is essentially the same, and in each case the words seem to be used in the present tense, and apply to the actual stockholder when the execution is issued. This is the natural and fair construction, and ought to prevail, unless it is strongly inferable or can be clearly shown that a different meaning was intended. It is argued by counsel here that it was-intended to make those stockholders liable who owned the stock when the debt was contracted; that they, in fact, incurred the liability, and that the responsibility cannot be shifted from them and placed upon others who were not interested in the corporation at that time ; that the credit may 'have be'en given on account of the known ability of the persons owning the stock, and it would be an act of impolicy and bad faith to release them and compel the creditor to seek satisfaction from persons who had subsequently bought the shares, and might, moreover, be insolvent. If the act is open to construction, these reasons are doubtless entitled to consideration; but there is also another side to .this view of the subject. A statute in New York incorporating a company declared that the stockholders of the corporation should be liable, jointly, — 464 — severally, personally, for the payment of all debts or demands contracted by said corporation or their authorized agent or agents; and any person having any demand against the corporation might sue any stockholder, director or directors, etc. The Supreme Court, in construing this statute, held that the suit could be brought only against such as were stockholders when the debt was contracted, and not those who became so afterward. (Moss v. Oakley, 2 Hill, 265.) Although the phraseology of the New York law is somewhat different from the language used in our statute, yet it may be conceded that the principle is the same. In the opinion in Moss v. Oakley the court said that it must be admitted that the statute might be so construed, without doing any violence to the language, as to make it apply to those persons who were stockholders at the time suit was commenced; still, they thought that it was the intention of the law-makers to charge those persons who were stockholders at the time the debt was contracted, and not those who became stockholders at any subsequent period. This case was followed in two or three other instances, till finally the matter was taken to the Court for the Correction of Errors and Appeals, where the above doctrine was disapproved, and the rule was announced that the provision in the act of incorporation rendering the stockholders liable for its debts was applicable to persons owning stock when the suit was brought, and not to those who were stockholders when the debt was contracted. (McCulloch v. Moss, 5 Denio, 567.) I have been unable to find that the rule contended for ever obtained any standing elsewhere than in New York, and even there it has been disclaimed and overruled in the highest tribunal. In Massachusetts there has been one uniform line of decisions on the question. By the statute it was enacted that whenever any execution should issue against any manufacturing corporation created, and such corporation should not, within fourteen days after demand made upon the president, treasurer, or clerk of such corporation, by the officer holding the execution, show to him sufficient real or personal estate to satisfy and pay the sums due on such execution, the officer should serve and levy the same upon the body or bodies, — 465 — and real or personal estate or estates, of any member or members of such corporation. It was held that a stockholder who ceased to be such before the execution was not liable. The court say: “The provision is, that a creditor in a certain case may levy his execution upon the body or estate of any member of the corporation. This must be understood of such as were members at the time of the commencement of the action, and of those only.” (Child v. Coffin, 17 Mass. 64; Bond v. Appleton, 8 Mass. 472.) In Connecticut, under a like statutory provision, where an action of assumpsit was brought, after the insolvency of the corporation for money advanced on its notes, against those who w;ere members at the time the debt was contracted, but had transferred their stock before the commencement of the suit, it was decided that the defendants were not liable, but that the action must be prosecuted against those who were stockholders at the time of the institution of the proceedings. (Middletown Bank v. Magill, 5 Conn. 28.) The same construction is held on this class of liabilities in England. The thirty-sixth section of the company’s clauses (Consolidation Act, 8th and 9th Yict., ch. 16) enables execution to issue against any of its shareholders, if the property or effects of the company prove ineffectual; and the courts hold that the persons liable are shareholders at the time of the sheriff’s return of milla bona. (Nixon v. Green, 11 Exch. 550.) The words employed are general in the constitution: “In all cases each stockholder shall be individually liable.” In the statute they are: “If there cannot be found whereon to levy such execution, then such execution may be issued against any of the stockholders. ” In the first place, the debt is the debt of the corporation, and not of the individual stockholder; the remedy against the corporation must be exhausted and proved ineffectual before resort can be had to the private shareholder, A corporation is a permanent body, with the qualities of succession and perpetuity; its members may die, or be changed by transferrence of stock, but it remains the same. The Legislature and the constitution intended that the property of this body should at all times be liable for the debts contracted by it. Eor this — 466 — purpose the corporation was made liable to be sued, and, lest at any time the corporation should fail to pay its debts, a remedy was applied against that tangible body, which at all times must be appended to it, namely: the members. Now, the inquiry is, what members ? It is clear that the law contemplates the members of a fluctuating body, one that may be daily and even hourly changing, though the corporation, as such, is to remain permanent. But still the tangible body, though perpetually shifting, must be equally permanent with the corporation, since there must be stockholders so long as there is stock; and, of course, there must always be individuals to be called upon in the case of a failure of the company to pay their debts. The mode by which these changes take place is easy— a simple transfer on the books passes the title and effects a substitution of parties. It invests one person with all the rights, privileges, and immunities of membership ; causes another to cease to be a member, and deprives him of all right thereafter to act or be heard in the management of the affairs of the company. And yet, if the theory of the defendant’s counsel is correct, the latter is, to all intents and purposes, in relation to their creditors who became' such while he was a member, a member still, though not as to any right to participate in the profits, but merely to share the loss. He becomes a victim to others — immolated at the mercy of the corporation and its creditors. In vain he appeals to the creditors to secure their debts while corporate property remains in abundance; and equally vain is it for him to appeal to the justice of the members of the corporation. He has no power to coerce, to advise, to participate in the management or share in the profits, if the business is successful; but he has the consolation of being allowed to pay if unsuccessful through mismanagement, imprudence and dishonesty, or disaster. Possibly the Legislature may have intended to produce such a state of things, but I am not sufficiently credulous to believe it. Corporations do their business in part, at least, upon credit; and, as by law the stockholders as well as the corporation .are made liable to be sued- for the debts, it was certainly contemplated that those members should be liable who were such at the time the default was made by the principal — 467 — body. There is nothing unfair or unreasonable in this. It was not intended that a man who had purchased a share in a company should continue to be bound after it should pass beyond his control into the management of others. In Middletown Bank v. Magill, supra, the judge, in delivering the opinion of the court, puts this illustration: “ But further; suppose we should examine a little more particularly this supposed equality, since it is claimed the proviso is to receive its construction from it ? At the proper season materials are purchased on credit sufficient to enable the corporation to carry on their concerns for a longer or shorter period — suppose a year. A., a member, immediately after transfers his interest to B., who is a’ member at the time. A suit is brought to recover the price of such materials. If these are worked up, B. is entitled to his share of the profit of them; and if not, he, as a corporator, has an interest in them. A. has no more interest in it than any other stranger. Should a profit be made, B. shares in it. ’Should the manufactures derived from these materials be sold on credit, B. has an interest in it; or should they be sold for cash, as a corporator he is entitled to his proportion. And yet A., it is claimed, is bound to pay the debt, though B. is much the most responsible man; for it will be perceived that the argument does not proceed upon the ground that either the company or its members are insolvent or at all unable to pay such debts. Such a construction would, in a case not unlikely to happen, defeat the creditor of his debts. The members who are such at the bringing of the action may all be responsible, and even the corporation abundantly solvent, yet the corporation property may not be within the reach of the process of law, and those who were members at the time the debt was contracted be entire bankrupts.” But it is argued that, if it should be held that the actual stockholders only are liable who are such at the time the execution is issued, creditors will be defeated and defrauded .out of their just demands by transfers being made to irresponsible parties. I apprehend there can be no difficulty on this question. The law is well settled, the point is very clear, that no member can exonerate himself from liability or defeat the claims of creditors by trans — 468 — ferring his interest to an insolvent person or a bankrupt. The members of a corporation, therefore, who would be liable, if they continued members, to tbe creditors of tbe corporation, may still be treated as members if they have disposed of their interest to an insolvent or with tbe view of exonerating themselves from their personal responsibility. Tbe authorities all concur in this. (Ang. & Ames on Corp. § 623.) Tbe facts in this very case furnish an illustration of the foregoing rule. Some time previous to tbe issuing of tbe execution, Franciscus bad sold bis stock to De Baun, whom the evidence clearly proves to have been insolvent at tbe time of the sale. It is true there was no transfer made on tbe books; so there could be no dispute about fixing tbe liability of Franciscus. But bad tbe transfer been regularly made, it would have amounted to tbe same thing, as De Baun’s insolvency would have still left Franciscus responsible. That we have arrived at tbe proper construction, under tbe constitutional provision and tbe statutory law, is to my mind perfectly clear and apparent, and aid is directly derived by referring to tbe past legislation of the State. In tbe Revised Code of 1855 (§ 13, p. 372), in regard to tbe personal responsibility of stockholders, tbe liability is expressly confined to the debts of tbe corporation contracted during tbe time of tbe stockholder’s ownership of tbe stock. There was no doubt, under that law, as to what particular stockholder was liable. Had tbe same liability been intended in tbe revision of tbe statute, tbe provision would have been preserved or words of like import would have been used. But instead of that we see tbe phraseology totally changed and a grammatical arrangement employed requiring an entirely different construction. Tbe section, as now embodied in the statute, comports with tbe enactments in other States and in England as designating tbe stockholders liable; and, as we have seen, there is remarkable harmony existing in tbe decisions on tbe question. After an attentive examination of tbe whole subject, I have discovered no error in tbe record, and think tbe judgment should be affirmed. Judge Bliss concurs; Judge Currier not sitting, being interested as counsel in a like question.