Case ID: ohio-st_17/html/0080-01.html
Source: Caselaw Access Project
Author: {"author": "White, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Robert Wright et al. v. John McCormack et al.
    1. The liability imposed by section seventy-eight of the act for the creation and regulation of incorporated companies in this state (1 S. & C. Stat. 310; 4 Cnrwen, 2582), on the stockholders of certain corporations therein named, in addition to their stock subscribed, is a security provided by law for the exclusive benefit of the creditors, over which the corporate authorities have no control; and an attempted assignment of such liability by the corporation, though for the equal benefit of all the creditors, is inoperative.
    2. This statutory liability of the stockholders is not a primary resource or fund for the payment of the debts of the corporation; but is collateral and conditional to the principal obligation which rests on the corporation, and is to be resorted to by the creditors only in case of the insolvency of the corporation, or where payment can not be enforced against it by ordinary process.
    3. Where an action is instituted by part of the creditors of an insolvent corporation against the stockholders, to enforce such liability for the benefit of all the creditors, no creditor can acquire priority, or institute a separate suit for the enforcement of such liability in his own behalf.
    Error to the court of common, pleas of Knox county. Beserved in the district court.
    The original action was commenced in the court of common pleas of Knox county, by John McCormack, one of the ^-defendants in error, against Charles Cooper and a corporation known as The Five-Mile Furnace Company, and Bobert Wright and the seven other plaintiffs in error, who are stockholders in said corporation.
    The original petition shows: That certain persons named, on January 2,1855, formed a manufacturing corporation, known as “The Five-Mile Furnace Company,” with a capital.of twenty-five thousand dollars, to manufacture pig-iroD, at Star township, Hocking county, Ohio, under the “ act to provide for the creation and regulation of incorporated companies in the State of Ohio,” passed May 1, 1852, and the amendments to said act.
    That the corporation, having been duly organized, became indebted to Cooper in the sum of five hundred dollars, which claim was afterward assigned to the plaintiff by Cooper, who guaranteed its payment; and that the plaintiff had recovered judgment thereon against the corporation and Cooper, and that the judgment was still in full force and unsatisfied.
    That executions had been issued on the judgment against both defendants and returned, “ no goods or chattels, lands, or tenements found whereon to levy;” and that in fact neither defendant had property, subject to levy, to satisfy the judgment.
    That at the time the corporation became indebted, and at the time of the rendition of the judgment, the defendants who are the present plaintiffs in error, and George W. Howard' (who was not served with process) constituted the stockholders of the corporation, and, as such, were liable under the statute to the amount of their stock — each holding more than the amount of the judgment.
    The plaintiff prays judgment against said stockholders for the amount of his judgment with costs, and for other relief.
    The plaintiffs in error filed a joint answer. The second defense is, in substance, as follows:
    That on the 11th of January, 1858, The Five-Mile Furnace Company, by its assignment, in writing, of that date, assigned and transferred to defendants, Robert Wright, Richard Adcock, and Samuel Allen, all the property and effects of the company, in trust for the mutual and equal benefit of its ^creditors; that the assignment includes as well the personal and individual liability of the stockholders, as all other choses in action, debts and dues of the company, which was then largely insolvent, being indebted not loss than fifty thousand dollars, which was thirty thousand dollars over and above its whole assets.
    That on the 24th of April, 1858, Alfred S. Keffer, George Orr, Hiram Wilson, Dewan, James & Co., R. W. Booth & Co., and Wm. Glen & Co., filed in the court of common pleas of Hocking county, Ohio, their petition against The Five-Mile Furnace Company, these defendants, George W. Howard, John H. Cole, Wm. E. Coche, and Daniel Dunn and others, creditors of said company, setting out said assignment, charging the insolvency of said company, and that these defendants and others, the stockholders of the company, were individually liable, each in an amount equal to the stock owned by them respectively; that the assignment covered and conveyed to the assignees the liability of the stockholders; that the plaintiffs therein had severally recovered judgments against the corporation for large amounts, in the aggregate five thousand dollars ; that executions had been issued on the judgments and returned, “ no goods, chattels, lands, or tenements found whereon to levy;” and praying that the assignees be required to give security for the execution of their trust or be removed; that the assignees file an invoice of assets; that the trust may be executed; that the creditors of the company may be ascertained in such manner as the court shall direct, and the amount due to each ; and that all the stockholders, who may be found to be solvent and able to respond, bo required to pay the balance due from them, respectively, on their stock; and, also, each his ratable proportion of any deficit after the application of the assets and unpaid stock, not to exceed, however, in amount the stock held by each stockholder; and praying other proper relief.
    It is further averred, that immediately after the filing of the petition, the court acquired jurisdiction of the defendants thereto, including these defendants, by service of process, and by the appearance of all the defendants in the action, which is still pending in said court; that the assignees are in process *of executing the trust, under the orders of the court, and for which they have given ample security; and that the creditors, and the amount due each from the corporation, including the claim on which the plaintiffs’ judgment was rendered (though in the name of the assignor, ■Cooper), have been ascertained by the report of the refei'ee in said action, under the orders of said court.
    To this defense the plaintiff demurred.
    There were other defenses set up, not material here to notice.
    The demurrer to the second defense was sustained, and judgment rendered in favor of the plaintiff below, for the amount of the judgment set out in the petition, against' the present plaintiffs in error.
    To reverse this judgment the present petition in error was filed in the district court, and by that court reserved for decision .here.
    
      Hunter & Daugherty, for plaintiffs in error:
    1. In regard to the individual liability of-stockholders of a corporation (Const. Art. XIII., sec. 3; S. & C. Stat. 310, sec. 78), on examination of our statutory provisions, we conclude :
    (1.) The liability in question is, in its nature, a security provided by law for the creditors, collateral to the usual direct liability of the corporation, and is not a primary resource to ■which, recourse may be had by the creditors, but secondary only, and only to be resorted to when the direct corporate liability fails.
    (2.) It is not a contract liability, but a statute liability, incidental to the relation of stockholder, and may be used by the corporation as a legitimate basis of corporate credit, and is, in equity, a corporate fund, amenable to pay corporate debts, and limited exclusively to that use.
    (3.) It is a separate, and not a joint and several liability, each being liable to the extent of the amount of his stock only, but, within that limit, the principle of pro rata contribution is applicable, as in ordinary cases of co-sureties.
    (4.) On the principles of equity, and by analogy to the stautute in cases of turnpikes and plank-roads, the corporation *has the right, in a proper state of case, to demand contribution within the limits of their liability from the stockholders, as maybe necessary to pay the corporate debts and liabilities. Such a state of case would, in our opinion, only exist when the other corporate assets would be inadequate to pay the corporate liabilities; and in such case, this liability is to be enforced, at the suit of the corporation, by civil action in the nature of a bill in equity, against all the stockholders within the jurisdiction of the court. In this proceeding the chancellor would, in the usual way of taking accounts in such eases, ascertain the liabilities to be provided for out of this special fund, and compel contribution accordingly.
    (5.) A like remedy is undoubtedly open to all creditors, but only, as we think, as a secondary resort, after the corporate assets primarily liable shall be exhausted; and then only upon principles of equitable contribution, above indicated — that is, pro rata among the stockholders, in the nature of a proceeding by a judgment creditor to subject equities, though not so that a single judgment creditor, by any steps that may be taken, may thereby secure to himself any priority or preference. This remedy in behalf of a creditor should, we think, be dependent upon the fact whether or not the corporation moves in the'matter; and might, indeed, be limited to cases of omission or negligence on the part of the corporation to proceed.
    (6.) For the same reasons, any stockholders might, in a proper case, invoke the aid of the chancellor to coerce contribution in virtue of the statutory liability to pay debts. This may, we suppose, be done in any case of insolvency or inability of the corporation to pay its debts with its ordinary assets.
    (7.) Upon no recognized principles can it be allowed to a creditor — for himself alone, and not for the benefit of all creditors — to maintain an action on this statute liability of stockholders, against a single stockholder or any number less than all within the reach of the process of the court.
    The adjudications of the coiu’ts of other states on this subject sustain these views. Bank of Poughkeepsie v. Ibbotson, 24 Wend. 479; Van Hook v. Whitlock, 3 Paige, 409 ; 19 *Johns. 456; 8 Cow. 387; Garrison v. Howe, 3 Smith (17 N. Y.), 458; Knowlton v. Ackley, 10 Cush. 97; Crease et al. v. Babcock et al., 10 Met. 525; Harris v. The First Parish of Dorchester, 23 Pick. 112.
    2. The court below erred in sustaining the demurrer to the second ground of defense set up in the answer. The suit in the common pleas of Hocking county had well attached, and its pendency was a bar to the right of the plaintiff to maintain his action in this case. Code, sec. 37; Story’s Eq. Pl., secs. 284, 284a, 285, 286a, 736; Miers and Coulson v. The Zanesville and Maysville Turnpike Road Company, 11 Ohio, 273; 13 Ohio, 197; Cadwalader v. Alexandrian Society, 11 Ohio, 292; Henry et al. v. V. & A. R. R. Co., 17 Ohio, 187.
    
      Curtis <& Scribner and William McClelland, for McCormack:
    1. The supposed assignment of the individual liability of the stockholders passed no interest threin, nor control over the same, to the assignees, and interposes no obstacle to the enforcement of the plaintiff’s claim.
    As to the nature of the liability in question, see Marcy v. Clark, 17 Mass. 330, 334; Grew v. Breed, 10 Met. 569, 574, 575; Middletown Bank v. Magill, 5 Conn. 28, 47; New England Commercial Bank v. Newport Steam Factory, 6 R. I. 154; Patterson v. Myomissing Manf. Co., 40 Pa. St. 117, 122, 123; Chesley v. Pierce, 32 N. H. 388, 405; Hicks v. Burns, 38 N. H. 141; Stanley v. Stanley, 26 Maine, 191, 196, 197; Allen v. Sewall, 2 Wend. 327, 338; Moss v. Oakley, 2 Hill, 265 ; Harger v. McCullough, 2 Denio, 119, 123; McCullough v. Moss, 5 Denio, 567, 573; Corning v. McCullough, 1 Comst. 47; Hawthorne v. Calef, 2 Wallace, 10; A. & A. on Corp. (8 ed) secs. 619, 624; Mill Dam Foundry v. Harvey, 21 Pick. 455; Carver v. 
      Braintree Manf. Co., 2 Story, 447; Gray v. Bennett, 3 Met. 522, 530, 531.
    The question whether a stockholder may protect himself against the claims of creditors, by showing that he has already paid debts of the corporation to an amount equal to the extent of his liability; does not bear upon the point under discussion, nor does it arise in this case. See, however, *Briggs v. Penniman, 8 Cowen, 10; Garrison v. Howe, 17 N. Y. 458; U. S. Trust Co. v. U. S. Fire Ins. Co., 18 N. Y. 199; Grose v. Hilt, 36 Maine, 22; Ingalls v. Cole, 47 Maine, 530 — cases in which the right of the stockholder to make the defense is considered.
    2. As to the form of the remedy to be adopted in eases of this character.
    As the act relative to the personal liability of stockholders, passed April 17, 1854, “ does not designate the kind of action or prescribe the mode of proceeding” to enforce that liability, a suit to that end is to be regarded as a civil action under the code, and to be proceeded in accordingly. Code, secs. 605, 614; S. & C. Stat. 310, sec. 95.
    The liability of the stockholder is several, and not joint. And the creditor may proceed to enforce, this several liability of the stockholders without uniting them all; is at liberty to resort to an action at law. A. & A. on Corp. (8 ed.), secs. 619, 624, 626; Patterson v. Myomissing Manf. Co., 40 Pa. St. 117, 122, 123 ; Van Hook v. Whitlock, 3 Paige, 409; Bank of Poughkeepsie v. Ibbotson, 24 Wend. 473; S. C., 5 Hill, 461; Ex parte Van Riper, 20 Wend. 614, 617; Garrison v. Howe, 17 N. Y. 462; Come v. Brigham, 39 Maine, 35, 40; Ingalls v. Cole, 47 Maine, 530 ; Nixon v. Brownlow, 1 Hulst. & Norm*. 405; S. C., 48 Eng. Law & Eq. 323; Purdy v. Owen, 12 Ohio St. 73.
    The plaintiff below, in his petition, states a perfect case against the defendants.
    3. As we understand the second defense, the whole scope and object of the proceeding therein recited, is to compel the faithful execution of the trust under the assignment, and the individual liability of the stockholders is treated as a portion of the assets of the company, to be administered in the same manner as its property and effects.
    But the assignment does not and can not pass the personal liability of the stockholders to the assignees, nor give them any control over it. And we insist, further, that a creditor’s bill, the.purpose of which is to enforce the due administration of the assets of an insolvent corporation, can not, by erroneously assuming .that the personal liability of the stockholders ^passes under .the trust, deprive other creditors of the right which the law gives them to proceed directly against the. stockholders.
    Our proceeding does not interfere in any nmnner with the administration of the property and assets of the company. See Cole v. Butler, 43 Maine, 401; Ingalls v. Cole, 47 Maine, 530, 541, 542.
    According to the averments of the answer, .the claims of the creditors who instituted proceedings in Hocking county amounted to about five thousand dollars. If, therefore, their action had been directly against the stockholders to enforce their individual liability, it could present no impediment to a like action by other creditors for the same purpose; and assuming that the creditors in Hocking county had acquired priority as to the amount of their claims, the balance of twenty thousand dollars due from the stockholders furnishes an abundant fund for the payment of the debt of six hundred dollars due our client.
   White, J.

The action of the court below in sustaining the demurrer to the second defense, and in rendering final judgment against the plaintiffs in error, must be reversed.

The court of common pleas of Hocking county had, before the filing of the original petition in this case, acquired jurisdiction over the statutory individual liability of the plaintiffs in error, as stockholders in The Five-Mile Furnace Company, to enforce its collection for the benefit of all the creditors of the company, including the plaintiff below, without regard to the attempted assignment of such liability by the corporation, which was inoperative to transfer or affect such liability.

The object of the second defense is to set up the pendency of the suit in the Hocking common pleas as a bar, and to turn the plaintiff McCormack over to that action for his remedy; thus relieving the defendants of the burden of being required to respond in separate suits, instituted in different courts, for the enforcement of their liability.

The facts stated show the suit to have been instituted by the plaintiffs not for themselves alone, but for the equal benefit of all the creditors of the insolvent corporation; and *that the object was to effect an equitable distribution of the assets of the corporation, and to subject to the payment of the creditors the statutory liability of all the stockholders; and that after exhausting the assets, and the aggregate liability of the stockholders, of twenty-five thousand dollars, a deficiency in the payment of the debts will still remain.

The averment that this statutory liability was included in the assignment and transferred to the general assignees of the corporation, had no legal effect; and the right of the plaintiffs instituting the suit, and of the other creditors, to enforce such liability in that suit, was unimpaired by the averment.

The statute under which the liability arises contains no provision in regard to the manner in which the liability is to be enforced. It is a provision inuring to the benefit of the creditors of the corporation; but in what way, and upon what principles of equity, as between creditors, and as between stockholders, it is to be made available, and under what circumstances resort may be had to it, are matters left for judicial determination, and on the consideration of which, beyond what may seem to be required by the case before us, wo arc not called on to enter.

The provision of the constitution on the subject is as follows:

“ Dues from corporations shall be secured by such individual liability of the stockholders, and other means, as may be prescribed by law; but in all cases, each stockholder shall be liable, over and above the stock by him or her owned, and any amount unpaid thereon, to a further sum at least equal in amount to such stock.” Art. 13, sec. 3.

The Five-Mile Furnace Company was organized under the act to provide for the creation and regulation of incorporated companies in the State of Ohio, passed May 1,1852, as amended April 17, 1854. Section 78, under which the liability arises, provides:

“ All stockholders of any railroad, turnpike, or plank-road, magnetic telegraph, or bridge company, or any joint stock company, organized under the provisions of this act, shall be deemed and held liable to an amount equal to their stock subscribed, in addition to said stock, for the purpose of securing 'Hhe creditors of such company; and the' trustees or directors of every society or association incorporated under section 66 of this act, shall be deemed and held individually liable for all debts contracted by them for their respective societies or associations.” 1 S. & C. Stat. 310 ; 4 Curw. 2582.

The statute adopts the minimum liability allowable by the constitution, and was intended to make the constitutional provision effective.

The liability thus imposed on stockholders is not a primary resource or fund for the payment of the debts of the corporation. It is collateral and conditional to the principal obligation which rests on the corporation, and is to bo resorted to by the creditors only in case of the insolvency of the corporation, or where payment can not be enforced against it by the ordinary process. It is a security provided by law for the exclusive benefit of the creditors, over which the corporate authorities can have no control.

The liability on the part of the stockholders is several in .its nature, but the right arising out of this liability would seem to be intended for the common and equal benefit of all the creditors. But however this may be, we are unanimously of the opinion that, where proceedings are instituted by part of the creditors of an insolvent corporation against the stockholders, to enforce such liability for the benefit of all the creditors, no creditor can acquire priority, or institute a separate suit for the enforcement of such liability in his own behalf.

The final judgment of the common pleas, and the judgment sustaining the demurrer to the second defense are reversed, and the cause remanded for further proceedings.

Day, C. J., and Welch, Brinkerrhoee, and Scott, JJ., concurred.