Case ID: walker_4/html/0476-01.html
Source: Caselaw Access Project
Author: {"author": "Per Curiam.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

DENGLER vs. HELMS.
    Directors of a proposed corporation who enter mto a contract for "the benefit of the corporation before the charter is obtained, become personally liable on such contract.
    Stockholders are individually liable upon contracts which they authorize the directors to make before incorporation.
    Error to Common Pleas of Schuylkill County. No. 336 January Term, 1883.
    This was an action for painting and glazing the Pottsville Market House, brought by P. D. Helms against seven directors, individually, of the Market Plouse Association, which was afterwards incorporated. Upon the first trial the Court directed a verdict for defendants; but granted a new trial in the following opinion, per:
    Green, J.
    This is a motion for a new trial. When the case was on trial 1 was strongly, under the impression that the plaintiff’s remedy was against the corporation of the Mountain City Hall and Market House Company, and directed- a verdict for the defendants. Subsequent reflection, and an examination of the case, have satisfied me that I was in error in thus directing the verdict.
    The evidence in the case was that a large number of persons had associated themselves together, in the winter of 1875-6, for the purpose of erecting a market house in the borough of Pottsville. The capital stock was to be $20,000, consisting of four hundred shares of fifty dollars each, forty per cent, of which was to be paid in before the first of April, 1876. The statement attached to the subscription list sets forth that, it was the intention of the subscribers to become incorporated under the Act of 1874, P. L. 73, as soon as the required .amount of stock was subscribed for. A meeting of the subscribers was held on the 24th of February, 1876, and a preliminary organization was effected. A board of seven directors was elected at this meeting, and three committees were appointed, one to draft Constitution and By-Laws, one to inspect market houses and prepare plans, and a third on obtaining a lease-of the ground. This was the only meeting of the subscribers prior to the incorporation in 1877; Üie board of directors, in the meantime, acting and exercising all authority in the name of the association. A charter was not obtained until 21 February, 1877, and a new board of directors was elected on 10 April, 1877, the old board having served up till that time. In the spring and summer of 1876 the board of directors, having executed the lease of the ground, and matured and adopted the plans for the new market house, advertised for proposals for building the same, and on 23 May, 1876, awarded to the plaintiff, P. D. Helms, the painting and glazing for the sum of $570.00. The building was at once commenced and was under roof before the end of the year, and the plastering was done after the cold weather set in. The principal part of the plaintiff's work was done before February, 1877, but it was not entirely finished until August, 1877, when it was accepted by the building committee. He was paid $200 by the association in 1876, and $30 by the corporation in 1877. The evidence further showed that advertisement of the notice of the intention to apply for a charter had been made as early as January 12, 1876. The delay in obtaining the charter was owing to the fact that the required amount of stock was not sooner subscribed. The plaintiff was not a subscriber. After the incorporation the debts and liabilities of the association were assumed by the corporation.
    The corporation having become insolvent, the plaintiff brought suit for the balance of his bill against all the original subscribers to the stock. Upon the trial of the case, after his ■evidence was in, he moved the Court to strike off all the defendants except the seven who constituted the board of directors, Messrs. Seidel, Dengler, Garretson, Ulmer, Kopitzsch, McCool and Nichols. This he did for the reason that the evidence had failed to show that the directors were authorized bjr the stockholders to enter into contracts and incur liabilities prior to the incorporation of the company. These are the material facts. After the evidence was all in I directed a verdict for the defendants, at the same time entering this motion for a new trial, in order to examine the question of liability more carefully than was possible in the hurry of trial.
    Must the plaintiff look alone to the corporation, or can he hold those with whom he contracted individually responsible? No doubt the plaintiff may hold the corporation liable for the debt.
    The association having been formed with a view to incorporation, and having accumulated property and received moneys, which were at once turned over to the corporation according to the original purpose, it .would be manifestly inequitable to allow it to receive the benefit, free from the liability, with which it had been burdened.
    The contracts having been made for the ultimate benefit of the corporation, and, with that end in view, it will not avail the corporation to set up as a defense its non-existence at the time of the making of the contracts, and that the contract was made with other parties not authorized to speak for it. On this point, Preston vs. The Liverpool, Manchester and New Castle, upon Tyne Junction Railway, 7 Eng. L. and Eq. Rep., 124, is a leading case, and this may be considered the law in this country as well as in England; see also Bell’s Gap R. R. Co. vs. Christy, 29 P. F. Smith, 59.
    Whether it is also necessary that the corporation should ratify such contract or assume the liability before it could be held for it, is not now important to decide. But if ratification is necessary before any liability arises, it would seem to follow as a necessary consequence that a primary liability existed in those who originally made the contract. This would be of weight in determining the question of individual liability in this case. The great current of authority shows that such ratification, either express or implied, is necessary before the corporation would be bound by contracts made before its creation by its promoters, even though made for its ultimate benefit; Payne vs. New South Wales Coal Co., 10 Ex., 283; Gunn vs. London and Lancashire Fire Ins. Co., 12 C. B., N. S., 694; 1 Lindley on Part., 395; Tilson vs. Warwick Gas Co., 4 B. and C., 962. Under what circumstances such ratification would be implied is to some extent discussed in Law vs. The Railroad Co., 45 N. H., 472, when it is said that “no promise to pay would be implied from the fact that such services were rendered at the request of any number of the corporators, less than a majority?” and, also, to the same effect is Bell’s Gap R. Co. vs. Christy, already cited.
    A large number of other authorities have been cited, but nearly all were cases where the effort was to hold the corporation liable for debts or contracts antecedently made, and are, therefore only indirectly applicable to the question in the present case. The effort here is the reverse — to hold the directors Individually liable. Can they be so held, and under what circumstances ?
    I think the true solution becomes easy upon reflection. Had the Market House Company merely existed as an association, and had the contract of the plaintiff been made with the board of directors, as its agents, there can be no doubt that all the members of that association would have been responsible to him. And the mere fact that they subsequently procured an act of incorporation for themselves could not change that responsiblity, unless the plaintiff himself saw fit to relieve them from it, and accept the exclusive liability of the corporation. If this is true, it must also be true that, if the board of directors, in making the contract with the plaintiff, did not represent the association and were not authorized to incur the liability, or exceeded the general scope of their authority, then they themselves would be responsible for the debts thus incurred, and they cannot, by the subsequent incorporation of the association, shift this responsibility against the consent of the plaintiff.
    The contract with the plaintiff was made by the board as-an association, not by it as a corporation — by what it was, not by what it intended to become at some indefinite time in the-future. Presumptively third parties deal with it only- on such a basis. The rules of law governing such a contract as this-must, therefore, be those governing contracts made with unincorporated associations. In such cases all the associators are personally responsible for the liabilities so created, just the same as a partnership, for the creation of the liability is-the act of each and every one of the associates.
    It is laid down as undoubted law in Angelí and Ames on Corporations, p. 574, sec. 591, that “there is the same distinction between incorporated and unincorporated joint-stock companies ; the latter in fact being but partnerships though established upon a large scale, and consisting of an indefinite, or of a very large number of joint undertakers, whatever name they may assume and use in the transaction of their business, it is but a partnership, and' not a corporate designationsee also-Ash vs. Guie, 10 W. N. C., 198.
    The fact that the association did not intend to form a partnership cannot change the nature of their liability, or relieve them from individual responsibility on the contracts made by it as an association; Hess vs. Werts, 4 S. & R., 356. In this last case the individual liability of the association was affirmed, even though the note on which the suit was brought stipulated that it was to be paid “out of their joint funds, according to the articles of association.”
    But it may be said that the present case may be distinguished from that of an unincorporated association in this, that it was organized with a view to incorporation, that the very articles of association provided for the obtaining of a charter as soon as sufficient stock was subscribed for, and that all contracts were made having this ultimate purpose in contemplation.
    But how can such a purpose or intention be made to effect the plaintiff ? He was no member of the association. He cannot be affected by what it intended to do. He was a stranger to it, and only dealt with it as it was. It does not even appear that he knew of its intention to become incorporated. If he did know, how could he tell that the intention would not be abandoned ? Peradventure it might be impossible to get sufficient stock subscribed, or other causes might prevent. What then ? Must the plaintiff be indefinitely postponed ? Must he lose Ids money by reason of the failure to become incorporated? Having made his contract with the association, it cannot be that it, or those with whom he contracted, are not liable. This must be so, unless it zvas part of the contract that the liability should fall alone on the corporation. If the association, or those acting in its name, wished to avoid liability, the true way was to await the incorporation of the association, or to have provided in the contract for the exclusive liability of the future corporation.
    “When an association, which has existed as a mere co-partnership, becomes incorporated, and the corporation then accepts an assignment of all the property of such association, for the purpose of carrying out their objects, they are primarily and jointly and severally liable for all the debts incurred before the act of incorporation.”
    Angelí and Ames on Corp., p. 576, sec. 592; Haslett vs. Witherspoon, 1 Strob Eq., 209.
    
      Says a learned writer in the American Law Review for April, 1882, concerning contracts made before incorporation, “We are for the most part dealing with contracts made by certain persons with certain others, which, to be sure, have some ulterior end in view, as contracts usually have; but the fact that this ulterior end is the incorporation of a company does not necessarily affect the rules of law by which these contracts are to be regulated, and the relations arising from them determined.”
    In this State the leading case on the subject is Witner et al. vs. Scheatler and one hundred and sixty-seven others, 2 Rawle, 359, and it is there ruled that the incorporation of a joint stock company which had united under articles of association, one of which provided for an application to the Legislature for a charter of incorporation, does not substitute the responsibility of the corporation for contracts previously made with the associates and exempt the members from liability, beyond the joint funds. It was further held that the action of the Legislature, declaring the. corporation solely responsible ■on such contracts, without the assent of all parties, was unconstitutional because it impaired the obligation of contracts.
    This case is stronger than the present one, for the work under the contract was all done after the incorporation, and the payments made on account were all made by the corporation. ■Yet this was not held to be a waiver of the plaintiff’s right '«gainst the associates, nor an implied assent to look exclusively to the corporation. The opinion of the Court was delivered by Gibson, C. J., and rules the present case. It is true that this view of the law is,to some extent, combated in the opinion of Huston, J., in the same case; but the strength of the argument Is with the chief justice. If the views of the former were adopted as the law of the case, we would have a shifting responsibility upon the corporation, if it should happen to become incorporated, but if this event should happen, then either «pon the individuals of the company or nowhere.
    The testimony in the present case does not show that it was ¡a part of the contract with the plaintiff that he should look exclusively to the corporation. Nor does the fact that a portion of the work was done after the incorporation, and that payment of thirty dollars made by the new corporation amounts to an agreement or even an assent to release the association •from liability and to hold only the corporation responsible. The fact that the corporation had become responsible (and this responsibility thus recognized by the plaintiff) does not militate against the continued liability of the association, and is not inconsistent with it. Both being responsible, a payment by one will only relieve the other to the extent of the payment, and no agreement of exclusive liability could be inferred from such a fact.
    This opinion has grown to unnecessary length, but it follows, from what I have said, that the Court was in error in directing a verdict for the defendants, and that the motion for a new trial should be made absolute. And now, May 29 di, 1882, rule for new trial made absolute.
    Upon the second trial, the Court charged the jury as follows, per:
    Green, J.
    Gentlemen of the Jury: This suit is brought by P. D. Helms against C. H. Dengler, Theodore Garretson, Jacob Ulmer, B. B. McCool, D. B. Seidel, Charles F. Kopitzsch, and M. R. Nichols, for the purpose of recovering from them a certain amount due to him, upon a contract entered into between him and them with reference to the building of a market house, known as the Mountain City Market House. The evidence in this case shows that these defendants had been elected directors ■of this association. There had been a certain amount of stock subscribed for the purpose of building a market house; a •certain number of persons had associated themselves together, and at the first meeting these defendants were elected the directors of this association.
    There was no incorporation of this Association from February, when this first meeting was held at which these directors were elected, until about a year following. We think the corporation was incorporated on the 28th of February, 1877, and tbe first meeting was held on the 24th of February, 1876, so» that there was no incorporation of the company, as a company, until the 3»ear after this Board of Directors was elected.
    This Board of Directors, immediately, upon their being-elected by the stockholders, appointed committees and entered into contracts for the purpose of building this market house. The work on the market house was commenced about June, 1876. Plans were adopted by the Board of Directors, contracts were awarded to different parties for digging foundations, brick work and so forth, and the Board of Directors, awarded a contract to Peter D. Helms for painting and glazing at 570 dollars. He went on in connection with the others, and commenced doing his work, according to the testimony, in June, 1876, and continued at the work until he claims his contract was completed sometime in 1877.
    These directors having entered into this contract, with Helms, ordinarily if authority to enter into the contract had been shown on the part of those who were stockholders in this, association, then all the stockholders would have been individually liable to Helms for the payment of the money due on his contract, after he had completed his contract. If the company had been incorporated at the time the contract was entered into, then he would not be able to hold the stockholders individually liable, but he could only, look to the company itself, as a company, for the purpose of getting his pay for the contract. But where the contract is entered into with an unincorporated association the general rule of law is that all the members are liable for the payment of the debts of the unincorporated association.
    If the testimony in this case had shown that the stockholders had authorized the Board of Directors to enter into this contract, and to build this market house, then all the stockholders would be liable for the contracts, and for the debts created in the building of this market house.
    . But you have here in evidence the fact that the only meeting of stockholders was a meeting- held on the 24th of February, 1876. All that was done at that meeting was simply the election of a Board of Directors for this association, and the appointment of a committee for the purpose of. securing the additional amount of stock required, in order to become incorporated according to their agreement among themselves. That was all. [But after the Board of Directors was elected, instead of waiting until the corporation had been actually, incorporated, the Board of Directors went to work, procured plans and proceeded to build a market house. They awarded contracts; and then it necessarily followed that, if they were not authorized by the stockholders to do this, that the Board •of Directors would themselves become responsible for the contracts which they authorized, and which they entered into with other parties.]
    [For that reason, we say to you as a matter of law, that the Board of Directors in this case, having entered into a contract with Peter D. Helms for the purpose of having painting and glazing done to the amount of 570 dollars, that they would be personally liable to Helms for the payment of the amount of this contract, unless the evidence itself should show that Helms agreed that he would not hold them responsible, but agreed that he would hold the corporation, when it was incorporated, responsible for this debt.]
    There is.no dispute as to the amount that is due to Helms under this contract as I understand it. His contract was for 570 dollars. He received 200 dollars, which would leave the amount still unpaid 370 dollars. In addition to that, he claims that he did extra work prior to the incorporation, to the amount of seven dollars and eleven cents. That would make the amount due him 377 dollars and eleven cents.
    Contracts that he may have entered into subsequent to the incorporation, subsequent to February, 1877, he, of course, could not hold the Board of Directors individually responsible for, because then his contract was made, not with them as Individuals, or with an unincorporated association, but his contract was then made with the company, with the incorporated company, and he could hold the company only liable for that portion of the indebtedness. [It becomes, perhaps, a .question of fact for you to determine, under all the evidence in the case, as to whether Helms did agree that he would only look to the company for the payment of his money, instead of looking to the individuals composing the Board of Directors.]
    The testimony here is that this company was incorporated in February, 1877, and that Helms was paid thirty dollars on account of his bill in August, 1877; and it is claimed by reason of the fact that he had accepted a payment from the company of thirty dollars; therefore, it is evidence to show that he agreed to look to the company for payment of the amount due him, and to release or relieve the Board of Directors from their personal responsibility.
    We say to you that the mere acceptance, or mere receipt, by him of money from the corporation in payment of his bill, would not have the effect of releasing the defendants from their personal liability. Of course it would have the effect of paying the bill to the extent of that amount of money, but .would not have the effect of relieving the Board of Directors from their personal liability to Helms for the payment of what was still unpaid on account of his contract.
    February 2, 1883, verdict for plaintiff for $500.48.
    Defendants then took this writ of error. The first three errors were as to F. Kopitzsch, he not having been served. The fourth error was to the portion of the charge in brackets. Other errors were to the Court’s allowing the unsworn minutes of a meeting that all the directors were present as the foundation of the liability of the present defendants.
    
      N. Heblich, G. R. Kaercher and A. W. Schalck, Esqs., for plaintiffs in error,
    argued that there was no individual liability of the stockholders sued; Youghisgheny Shaft Co. vs. Evans, 72 Pa., 334; Witmer vs. Schlatter, 2 R., 359; Bells Gap R. R. vs. Christy, 79 Pa., 54; Fay vs. Noble, 7 Cushing, 188; Bank vs. Almy, 117 Mass., 476; Preston vs. Railway Co., 7 E. L. & E., 124; Edwards vs. R. R. Co., 1 My. & Cr., 650.
    
      Hon. J. W. Ryon and W. J. Whitehouse, Esqs.,
    
    relied on the opinion of the Court below granting a new trial.
   The Supreme Court affirmed the judgment of the Common. Pleas on May 7th, 1883, in the following opinion:

Per Curiam.

The name of Kopitzsch appears to have been inadvertently united with the names of the other defendants below when the: jury were sworn. There was no exception taken thereto; yet inasmuch as he was not served, and no appearance or plea was. entered for him, he was never in court, and as to him the judgment is nugatory. His name is, therefore, ordered to be stricken from the record. As to the others, the case was well tried. There was no plea in abatement. Having gone to trial and tried the case on its merits, it was too late after the evidence-closed to interpose technical objections to the form of the pleadings. There was a labored effort to cast the personal liability of the plaintiffs in error on the succeeding corporation, but on the facts found by the jury, under a clear and correct charge, it justly failed. We see no error in the judgment, against all the plaintiffs in error properly, on the record as to them.

Judgment affirmed.