Case ID: misc_18/html/0722-01.html
Source: Caselaw Access Project
Author: {"author": "Russell, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

The Camp Manufacturing Co., Plaintiff, v. James Harriman et al., Defendants.
    (Supreme Court, New York Special Term,
    December, 1896.)
    Corporations — Liability of directors for failure to file annual report.
    The liability of trustees of a corporation under section 30 of the Stock Corporation Law, for failure to file an annual report is secondary, and can be resorted to only after judgment has been recovered against the corporation and the usual remedies exhausted.
    National Bank v, Dillingham, 147 N. Y. 147, followed.
    Motion for reargument.
    D. M. Porter, for motion.
    Charles D. Ridgway, opposed.
   Russell, J.

The plaintiff’s counsel moves for a reargument of the question decided upon-the issue raised by the demurrer to the complaint and states as the ground of his motion “ That the plaintiff’s counsel did not submit authorities on the question decided, because. the law has long been well settled that in an action against directors for failing to file a report, an individual creditor can sue an individual trustee, and that without having obtained a judgment against the company.”

Various cases are cited now by him in his brief with reference to the provision of section 12 of the act of 1848, for the incorporation of manufacturing companies, as amended, all of which cases rather assume than decide the position taken by plaintiff’s counsel. He does not refer to the latest case in the Court of Appeals (National Bank v. Dillingham, 147 N. Y. 603), construing the provisions of the Stock Corporation Law, under one of the se.cti.ons of which this action was brought, and which case I regard as decisive of the question here involved.

It must be remembered that prior to the revision of the Corporation Law, there were general acts providing for the incorporation and regulation of the different kinds of corporations, each of which had provisions special and peculiar in regard to the creation of the corporation, its management and dissolution. The design of the general act now in force was to provide general regulations for all stock corporations, by a harmonious uniform system, and these general provisions differ materially from the special provisions contained in prior laws for the formation of peculiar classes of corporations, including that of 1848, for manufacturing companies. It became, therefore, necessary for the Court of Appeals, in construing the Stock Corporation Law to lay' down so far as. pertinent, the principles upon which the liabilities-of directors .and stockholders were based and the manner of enforcing the remedies against individuals connected with the corporations, where those corporations were unable to meet their debts.

The case of The National Bank v. Dillingham, supra, was decided upon a claim of liability under section 24 of the Stock Corporation Law (chapter 688, Laws of 1892), which in no manner provided for the enforcement of the claim against the corporation first, but declared that the directors creating or consenting to a debt increasing the total indebtedness of the corporation, not secured by mortgage, beyond its paid-up capital stock, should be personally liable therefor to the creditors of the corporation. The Court of Appeals unanimously held, that this personal liability was secondary and could only be resorted to after the usual remedies against the corporation itself had been exhausted. In the opinion of Judge O’Brien, concurred in by all the other judges, these principles were announced with great clearness:

Firstly: That it is a fundamental proposition, to justify the contention that the creditor can directly sue the director, that the liability must be primary and contractual and the action maintained in the same manner as if the trustees themselves owed the debt to the creditor.

Secondly: That the primary common-law liabilities of persons engaged in the enterprise of creating the corporation cease upon the creation of that artificial person capable in law of acting and contracting for itself. .

Thirdly: That the liability of the trustees rests wholly upon the statute which creates the liability in the nature of a penalty for disobedience to its commands. “ The neglect of the trustees to file the report required by the statute or the making of a false report, illustrates the nature of this peculiar penal liability.”

Fourthly: That the liability is a.pure creation of the statute and" has no foundation in contract and no existence at common law.

Fifthly: The benefit of the provisions of section 24 is given in terms to the creditors of the corporation and not tó a part of-them. “ The language includes all the creditors.”

Sixthly: “ The liability is secondary, to be resorted to only after the usual-remedies against the corporation itself have been exhausted. While there is no express direction to that effect in the' statute it is the general rule that it is to'be implied from the nature of the liability in the absence of some .provision clearly importing the contrary.” Citing People ex rel. Winchester v. Coleman, 133 N. Y. 279, and Rogers v. Decker, 131 id. 490.

Seventhly: That the immunity of members of the corporation from personal liability until the remedies against the corporation has been exhausted is founded in reason and justice. “And a very clear, indication of a legislative intent to disregard it must be found before the liability is held to be .primary.”

“ The general policy of the law in this respect is expressed in the fifty-fifth section of the Stock Corporation Law which provides that no action shall be brought against a stockholder for any corporate debt until judgment has been obtained against the corporation and an execution returned unsatisfied. The directors are of course stockholders, and it is reasonable, to assume that it was not intended to charge them with personal - responsibility on any other conditions than apply to. all the members of the corporation.”

In view of this reasoning, how-can a trial court hold directors liable, without any judgment against the corporation, as on a direct contractual liability, in an action brought under section 30 of the same Stock Corporation Law against the directors for failure to file a report, the provision in that section being: “If such report is not so made and filed, all the directors of the corporation shall jointly and severally be personally liable for all the debts of the corporation then existing, and for all contracted before such report shall be made.” The Court of Appeals, in the Dillingham case, hold that'section 24 made the directors hable to all the creditors; that the policy of the law is to give immunity to the members of the corporation until all remedies against the corporation have been exhausted, and that the liability of the directors is secondary in all cases where a debt exists against a corporation perfectly formed and transacting business. If the creation of a debt by the corporation, in excess of its powers, is not regarded as a primary liability against the directors authorizing it, how can it be said that a liability is primary where the section itself provides for a liability only for actual debts contracted by the corporation itself, which debts still remain the debts of the corporation and not the debts of the directors except by force of the penal statute? Section 30, more emphatically and clearly than section 24, regards the claim of the creditor as primarily a debt against the corporation itself, complete and existing as such, and makes the act .which gives the liability against the directors a penal act distinct and severed from any connection whatever with the creation or consideration of the original debt.

I regard the authority of this late case in the Court of Appeals, which I have so extensively referred to, as authority which I cannot disregard not only in the thing decided but in the process of reasoning which leads to that decision; and, apart from the force of the case as stare decisis, .1 think the logic of the opinion unanswerable as explanatory of the purposes and reach of the Stock Corporation Law, and as imputing to it a unity and symmetry which it would otherwise lack. If the whole of this law shall be construed upon the principles of the opinion in ¡National Bank v. Dillingham, that law will be easy of construction and cases brought under it can be far* more readily decided. The motion for reargument is denied.

Motion denied.