Swancoat v. Remsen

WALLACE, Circuit Judge. The first question which the demurrer to the complaint presents is whether, iff an action founded upon section 30 of the stock corporation law of this state (Laws 1890, e. [594] 564, as amended by chapter 688, Laws 1892), it is necessary to allege that a judgment has been recovered and execution returned unsatisfied against the corporation in favor of the plaintiff'. That section imposes upon the directors of a corporation which fails to mate the annual report prescribed by it an individual liability for all the debts of the corporation then existing. It is urged for the defendants that the case of Bank v. Dillingham, 147 N. Y. 603, 42 N. E. 338, is an authority in their favor, and they rely upon a recent decision by Mr. Justice Russell1 to that effect. In Bank v. Dillingham the court held that an action brought to enforce the liability of directors pursuant to section 24 of the stock corporation law is a suit in equity, and can only be resorted to after the usual remedies against the corporation itself have been exhausted. That section is substantially identical in its terms with statutes which have been construed by the supreme court of the United States, by the courts of Massachusetts, and by the previous decisions of the courts of this state, as intended to create an equitable fund for the equal benefit of all the creditors of the corporation, to be resorted to after the ordinary remedies at law against the corporation itself have been exhausted and reached by a suit in equity in which all the creditors and the corporation itself are to be parties or represented. Hornor v. Henning, 93 U. S. 228; Stone v. Chisolm, 113 U. S. 302, 5 Sup. Ct. 497; Bank v. Stevenson, 10 Gray, 232; Anderson v. Speers, 21 Hun, 568; McClave v. Thompson, 36 Hun, 365. The section under which the present suit is brought is a reproduction of a statute which has always been construed by the courts of this state as giving to the creditors a several remedy by an action at law against the directors in the nature of á penalty. Miller v. White, 50 N. Y. 137; Jones v. Barlow, 62 N. Y. 202; Rector, etc., v. Vanderbilt, 98 N. Y. 170. And it has never been intimated previously to the decision by Mr. Justice Russell that in an action brought pursuant to this statute it was necessary to allege and prove the recovery of a judgment against the corporation. In Rose v. Chadwick, 9 App. Div. 311, 41 N. Y. Supp. 190, the appellate division of the supreme court held that in an action like the present it was not necessary to allege that a judgment has been recovered against the corporation, and that Bank v. Dillingham was not an authority to the contrary. The other points urged in behalf of the demurrer are without merit. It was unnecessary to allege in the complaint that the several directors were stockholders during their term of office. If they were not, and if because of that fact they never became or ceased to be directors, the defendants will obtain the benefit of the fact upon the trial. It is not necessary to allege in the complaint facts showing the eligibility of the directors. The allegation that they were directors is sufficient. The provision in the bond, the debt upon which the suit is founded, that “no stockholder of this company shall be individually liable on this bond, or in respect thereto,” has no effect to relieve the defendants from their statutory liability as directors. It was not intended [595] to provide against liability of that sort; and, if it bad been, I cannot donbt it would be void as against public policy. It is not necessary for the plaintiff to set out the specific consideration of the bond of the corporation on which the suit isfounded. The bond itself imports a consideration, as business corporations have the general power to issue bonds; and if, in the present case, the corporation transcended its power in that behalf, that is a matter of defense. The demurrer is overruled, with costs. NOTE. Manufacturing Co. v. Harriman (decided at the special term of the supreme court of New York, December 31, 1896), 43 N. Y. Supp. 673. The opinion is as follows: “The plaintiffs seek to recover against two of the directors of the Keamer Lumber Company, a corporal ion, for goods sold to the corporation, without first having obtained a judgment against the principal debtor, and exhausting its remedies against that company. The liability of I he directors is based upon section 30 of the stock corporation law (chapter 688, Law's 1892), which makes all the directors jointly and severally liable for all the debts of the corporation in. case of failure to file a signed and verified annual report of the condition of the corporation as required by the statute. The court of appeals, in Bank v. Dillingham, 147 N. Y. 603, 42 N. E. 338, has passed upon section 24 of the same act, making the directors personally liable for creating a debt whereby the total indebtedness exceeds the paid-up capital. The court in that case held the liability of the directors to be secondary in its character, and not enforceable until a judgment was first obtained against the corporation. It was also held that the liability of the directors created a fund from which all the creditors, in a proper suit therefor, might, if sufficient, be paid. The distinction in verbiage between sections 24 and 30 is not so marked, within the reasoning of the court of appeals, as to justify a trial court in allowing the prosecution of the liability of the directors under section 30 without first obtaining a judgment against the corporation. The tw'o provisions of the different seel ions were designed to accomplish a common purpose which was to secure a fund out of which the creditors might be paid in case the directors failed to comply with the statutory regulations devised from considerations of public policy for the protection of creditors dealing with the corporation. In either case the creditors deal primarily with the corporation itself, give credit to the corporation, and should he permitted, in case they find that credit misplaced, to recover of the directors only in case of a demonstrated inability to collect of the corporation itself. A wide distinction must be observed between the reasons for holding stockholders and directors primarily liable for debts incurred before the capital is paid' in, or the other steps taken which are necessary to complete the existence of the corporation itself, — for until that period arrives there is no real corporation in existence, which is the principal party dealing with the creditors, — and the eases of credits extended to the corporation itself after it becomes competent to transact business. It. is also apparent by the provision of the stock corporation law that it is not designed to enforce any liability against stockholders after the full payment of their stock until judgment is obtained against the corporation itself, and directors must necessarily he stockholders to hold their cííice. The case of Bank v. Faber, 1 App. Div. 341, 37 N. Y. Supp. 423; Id., 150 N. Y. 200, 44 N. E. 779, was decidía! solely upon the question of Ihe effect of chapter 688, Laws 1892, as an implied repeal of chapter 564, Laws 1890. Judgment is therefore directed in favor of the defendants, sustaining the demurrer on the ground tha.t the facts stated in the complaint do not constitute a cause of action, with costs, and with leave to the plaintiff to amend within twenty days on payment of costs.” Footnotes [1] See note at end of ease.