#### John E. Brand, Respondent, *against*Parke Godwin, Appellant.

(Decided February 3d, 1890.)

Under the act of 1875 for the incorporation of limited liability companies, requiring the making and filing of an annual report, which must state the amount of the capital stock, and the proportion actually paid in, together with the names of the then stockholders (§ 18), and providing that an officer of the corporation shall be liable for all the debts of the corporation contracted while he is an officer thereof, where a report signed by him is “ false in a material representation ” (§ 21), a report stating that certain persons were stockholders to a certain extent, and including such sums in the amount of stock as actually paid in, where such persons were not in fact stockholders, subjects an officer signing such report to the liability imposed by the statute.

A'director is an “ officer ” within the meaning of that word as used in the statute.

To an action to charge a director with liability under the statute, it is not a defense that he signed such report under the advice of counsel, believing it to be true.

A contract obligation to pay a person employed for a certain time, a certain salary, is a “ debt ” of the corporation within the meaning of the statute.

In an action against an officer to charge him with the statutory liability for having filed a false annual report, a judgment against the corporation in an action for breach of contract is not conclusive evidence of the existence of a debt against the corporation.

The contract between an opera company and a singer, under which the latter was required to sing in various parts of the United States and Canada, for a period of 25 weeks, provided that, “ in the event either of incompetency, or of such continued illness or decrease of physical or vocal faculties as to prevent one from doing service for a period of more than two weeks, the company may, in its discretion, cancel or annul the contract with the party in question, without being subjected to any claims for damages. The vocal and musical directors shall be the sole judges of the fact and extent of the incompetency in applying this rule.” *Held,*that the “ incompetency ” referred to, must be such as was produced from physical causes arising after the contract was entered into, and did not mean merely “unsatisfactory.”

A notice terminating such contract, on the ground that “your work is not musically satisfactory to the board," stated that the notice was given in the exercise of a right under the provision above set forth. *457
      *Held,*that such notice was not an exercise of the right to discharge the singer for “ incompetency,” and as the contract gave no right to discharge merely for dissatisfaction, the notice was no defense to an action to recover the contract price.

Appeal from a judgment of the General Term of the City Court of New York affirming a judgment of that court entered upon the decision of the judge on a trial by the court without a jury.

The facts are stated in the following opinion delivered on the trial of the case in the City Court, by Browne, J.

“ This action is brought to recover the sum of $1,150, for which amount it is claimed the defendant, as one of the directors of the American Opera Company, Limited, has become liable under the statute, by reason of his having as such director joined in the annual report of the corporation made in January, 1887, which report contained material representations which were false in fact. The answer admits the incorporation of the opera company, and also that the defendant was a director during the periods mentioned in the complaint. The plaintiff’s claim is predicated upon a judgment recovered by him against the opera company upon two causes of action, founded upon an agreement in writing, entered into between the company and himself on July 1st, 1886, whereby he was engaged in the capacity of baritone at a weekly salary of $100, for a period of not less than twenty-five weeks, commencing on November 1st, 1886;—the particular allegations of the first cause of action being that he commenced to perform under that agreement, and continued for a period of nine weeks; that he was paid for only seven of- the nine weeks, not having received payment for the first two weeks specified in the contract, amounting to $200; and the second cause of action alleging that the plaintiff was wrongfully discharged from the employment of the opera company on January 1st, 1887, and claiming $1,600 damages for the unexpired term of sixteen weeks. The judgment was entered in that action by default on April 25th, 1887, for $1,823,90, damages and costs. An execution was issued against the* company *458thereon, and returned unsatisfied. After the plaintiff’s discharge, and before the expiration of the term mentioned in his contract with the opera company, he found other employment, by which he earned in the neighborhood of $750. Upon the trial this sum was credited upon his claim, thus reducing it to $1,150.

“ The complaint in the present action alleges, not only the facts to charge this, defendant with the statutory liability, but also the facts upon which the original cause of action was based; and the defendant by his answer puts in issue every fact, except that of the incorporation of the opera company, and that he was a director of such company during the period set forth in the complaint. By way of avoidance he alleges he signed the annual report before mentioned under instructions of counsel to said company, and in reliance upon said counsel’s statements, believing; the matters set forth in the report to be true.

“The first question to be determined is as to whether, the report as filed was false in any material part. The plaintiff alleges many false statements, from which I select two. If the allegations are sustained as to these, sufficient is shown to maintain the cause of action on that ground. The first is as to stockholders; the second is the amount actually paid in for capital stock. It was stated in the report, as filed, that C. P. Huntington and N. K. Fairbank were stockholders,—Huntington to the extent of $5,000 and Fairbank to the extent-of $2,500,—and that these sums had been actually paid in for the stock. These gentlemen were produced as witnesses upon the trial, and each testified that he was not a stockholder, had never subscribed for any of the stock, nor had ever paid to the company any sum of money for its stock. This testimony remains uncontradicted, and the witnesses are unimpeached. The falsity of this necessarily establishes the falsity of the other statement as to the amount paid in for capital stock of the company. The report states that the actual amount paid in for capital stock was $148,600, which includes the sums claimed to have been paid iti by Huntington and Fairbank. That these statements were ma*459terial is beyond question. Section 21 of the act of 1875, under which the company was organized, provides that an officer of the corporation shall be liable for all the debts of the corporation contracted while he is an officer thereof, where are port signed by him is false in a material representation. Section 18 requires that the corporation shall annually make a report to be filed in the office of the secretary of state, such report to state the amount of the capital, and the proportion actually paid in, and the names of its then stockholders. The mandatory character of this section as to what the report must contain would be sufficient to establish the materiality of the matters required to be stated. But, were we to look for a reason for the requirement, it could be found by saying that the legislature in its wisdom deemed it advisable to give the public an opportunity to become advised of the financial condition, as well as the personnel, of the corporation with whom it might have business dealings, and insisted upon compliance with the law by imposing personal liability upon those who assumed the duty of complying with section 18, and failed therein in the respectsmentioned. The defendant assumed that duty, and he cannot now escape liability on the ground that he was' not, as he claims, an officer of the company, within the meaning of section 21 of the act. By reference again to section 18, it will be seen that it requires that the report shall be signed by the president and a majority of the directors, and section 21 makes the officers who signed the report jointly and severally, liable for its falsity. The two sections should be read together, and when thus read it would be illogical to say it was not intended that all who signed the report should come within the designation of officers. The report was required to be signed by but one person, popularly known as an ‘ officer,’ and by the others named as directors. The legislature did intend that those who were possessed of the qualifications necessary to make the annual report were to be liable as ‘ officers ’ of the corporation for. the material false statements. Bouvier defines ‘ directors ’ to be ‘ persons appointed or elected according to law, authorized to manage and direct the affairs of a corpo-

*460ation or company,’ and an *‘*officer ’ to be one ‘ who is lawfully invested with an office.’ A director is such an officer, because he is lawfully invested with the power to manage the affairs of the corporation (see *Morse*v. *Lowell,*7 Metc. 152; *Com.*v. *Tuckerman,*10 Gray 173).

“ This leads us to the question whether the claim in this action was a debt of the company during the time the defendant was an officer. The contract was made on July 1st, 1886, to go into effect November 1st, 1886. By its terms the plaintiff agreed to place his entire services, in the capacity of baritone, at the disposal of the company for a period of not less than twenty-five weeks, the company agreeing to pay for such services the sum of $100 per week, or $2,500 in the aggregate. This obligation incurred on November 1st, 1886, was dependent upon performance or offer to perform by the plaintiff of his part of the contact. The evidence in this case is that the plaintiff not only performed as long as he was permitted, but was also ready and willing to continue in the fulfillment of his part of the contract at the time he was stopped and prevented by the company’s general manager, Locke. It has been held in *Howard*v. *Daly*(61 N. Y. 362), that where a performer was ready and willing to enter upon the duties of his engagement, but was prevented by his employer absolutely repudiating the contract, he was entitled to recover the amount of compensation fixed by the contract of employment for the whole, term, not as wages, but as damages for the breach; and in *Everson*v. *Powers*(89 N. Y. 527), it was held that in such a case the cause of action arose at the time of the breach of the contract, and that plaintiff was then entitled to sue and recover such actual damages as he had sustained by the breach. It is a logical sequence that an obligation of this character incurred by contract is a debt of the company, as it was an obligation for a sum of money which the compay was. bound to pay to the plaintiff by the terms of the contract. A contract obligation of this nature has been so often defined as a ' debt ’ that further reference to the subject would be an act of supererogation.

“ It is contended, however, by the defendant that the com-

*461pany was relieved from liability for the debt initially incurred under the contract by the exercise of the right given under the provisions of rule 6. If the right was correctly exercised, there would be no doubt that the company was relieved from such liability, and that the defendant in such case could not be held. It may be well at this point to dispose of a question raised by plaintiff that the judgment is conclusive of the company’s indebtedness to him if it is not impeached, and that the cause of action upon which the judgment is founded is not open to question in this action. He cites *Stephens*v. *Fox*(83 N. Y. 313), and *Allen v. Clark*(108 N. Y. 269,15 Northeast. Rep’r 387). An examination of these cases shows that they do not abrogate the rule requiring the establishment of the debt as a distinct issue in the case. In *Stephens*v. *Fox,*the court held that a judgment was competent evidence of the plaintiff’s *status*as a creditor, and of the amount due in an action against the stockholder for an amount unpaid on his stock. *Allen*v. *Clark*holds that a judgment for costs recovered against the corporation is a debt which could be enforced against a director for failure to file the annual report. It will be seen at a glance that the judgment in that case created the debt, and was the best evidence of it. In *McMahon*v. *Macy*(51 N. Y. 155), it was held in an action against a stockholder by a creditor of his company, to enforce a liability imposed by statute, that a judgment against the company is neither conclusive nor *prima facie*evidence of the existence of a debt against the company. This rule is the law to-day. The evidence offered by plaintiff leaves no room to question performance on his part, as well as his willingness and ability to continue if permitted by the company. The burden then shifted to the defendant to justify the termination of the contract, and he relies upon evidence introduced by plaintiff to sustain lys position. The evidence is a notice from the general manager of the company to the plaintiff in these words, ‘ Your work is not musically satisfactory to the board,’ and that the right to terminate the contract was exercised under rule 6 of the contract. The portion of rule 6 bearing upon the question of the right to discharge is in the foil ow-

*462ing language: ‘In the event either of incompetency, or of such continued illness or decrease of physical or vocal faculties as to prevent one from doing service for a period of more than two weeks, the company may*in its discretion cancel or annul the contract with the party in question, without being subjected to any claims for damages. The vocal and musical directors shall be the sole judges of the fact and extent of the incompetency in applying this rule.’ There is no evidence of ‘ illness, or decrease of physical or vocal faculties’ on the part of the plaintiff for any period of time, or that the musical or vocal directors had ever as a fact determined that the plaintiff was ‘ incompetent.’ The defendant claims that a proper construction of the sentence supports his theory that the word ■ ‘ incompetency ’ is so disconnected with the other clauses of the paragraph as to make it an independent condition, which, if found to exist in the performer by the vocal and musical directors, justifies the annulment of the contract. Grammatically construed, the defendant is correct in his proposition. The use of the comma before the word ‘ or’ in the sentence might be taken to denote that ‘ incompetency ’ and ‘ physical disability ’ are one and the same subject, while its omission would signify'different subjects; but the usé of the correlative of ‘ or,’ *i. e.,*‘ either,’ clearly indicates that “ or,’ notwithstanding the comma before it, should be accepted as a connective of substitutes in the sentence, thus making incompetency and decrease of physical power' separate conditions. Notwithstanding, the court is permitted in (he interpretation of contracts to reject grammatical constructions, and adopt those which will give effect to the intent of the parties. Portee, J., in *Hoffman*v. *Insurance Co.*(32 N. Y. 405, at p. 413), said: ‘ It is a rule of law, as well as of ethics, that, where the language of a promisor .may be understood in more senses than one, it is to be interpreted in the sense in which he had reason to suppose it was understood by the promisee.’

“ What was the sense in which the plaintiff understood the contract is to be gathered from the contract and its surroundings. He was engaged in New York as a baritone—that is, a singer possessed of a certain quality of voice. . He agreed *463to give Ms entire service in that capacity to the company; to sing in opera, public rehearsal, oratorio, concerts, etc., in various parts of the United States and Canada. The contract is printed with the space for the name of the performer in blank, while that of the company is inserted in printed type. All its provisions show jealous care for the protection and interests of the company. It was evidently prepared by the company after thoughtful consideration. The performer could hardly be expected to make a critical examination or nice analysis of its contents; nor, if he did so, would he be bound to understand from it that the penalty of dismissal by the company would attach at any moment the musical and vocal directors should deem it expedient to say he was incompetent, no matter what part of the country that conclusion might be arrived at, nor what period of a season. The contract refers to a season of ab'out 25 weeks as the term of its duration. Is is not more in accord with reason to assume that rule 6 was intended for the protection- of both parties,—that is, should the plaintiff from physical causes become unable to perform his part, and such disability continue for more than two weeks, the company could relieve itself from further liability; and on the other hand, in case the disability was merely temporary, the performer would be allowed a reasonable time to 'recuperate before being deprived of the benefits secured by the contract after binding himself for the season. In other words, if the baritone was one whom it was for the interest of the company to retain, temporary illness or disability would not relieve him from his contract. If temporary disability occurred, had he not the right to assume that the company should give him the opportunity to recover, and that he would not be arbitrarily dismissed without a cause arising from the conditions stated in the rule, and existing for more than two weeks ? But if we disregard all extrinsic circumstances, and take the language of the rule only as the guide for interpretation, the plaintiff is strengthened in his conclusions. Webster defines ‘ incompetency' to be ' want of sufficient power, either physical, intellectual, or moral; insufficiency ; inadequacy; ’ and illustrates -it by- incompetency of a child for hard labor; of *464an idiot for intellectual labor.’ Applying the definition to the ‘ incompetency ’ expressed, would it not occur to those whom it was intended to affect that it was such as would be produced from physical causes arising during the life of the contract ? If not, why use the phrase, ‘ or of such continued illness or decrease of physical or vocal faculties as to prevent one from doing service for a period of more than two weeks ? ’ ‘ Incompetency,’ in the signification claimed for it by the defendant, would include all classes and causes of disability, physical, and artistic. Why, then, environ that subject with special clauses, specifying causes which would produce results already comprehended within that generic' term, if it were not intended to place a limitation upon the scope and extent of the word, and to confine its meaning to the actual causes named,—‘ illness, or decrease of physical or vocal faculties.’

“ Again, the vocal and musical directors are made the arbiters of the fact and extent of the incompetency undei' the rule. If, as claimed by the defendant, there is no qualification or limitation upon the word, or it is notion trolled by any other word or sentence in the rule, why the necessity of its measurement by the directors? If the plaintiff was ‘incompetent,’ in an artistic senses he .was, under the definition, wholly unfit to perform as a baritone, and the fact and extent of that incompetency did not require to be adjudged by the directors as a reason for discharging him. The law secured to the company the right at any time, without such adjudication, to discharge the plaintiff for cause, such as unfitness or inherent want of ability to render the service which he agreed to render. It is the rule that, when a person" engages to perform a seiwice requiring the possession of special skill and qualities, there is an implied warranty on his part that he is possessed of the requisites to perform the duties undertaken, and, if found wanting, the right to discharge exists. If, then, the ‘incompetency’ intended by the rule was of such a character as time might remove, and as to the fact and extent of which the directors were to be the sole judges, it could only have applied to physical incompetency in its relation to this contract. It is scarcely to be assumed that, if he was in*465competent from an artistic standpoint, it could be qualified or measured, or that time would remove the disqualification, or that the company would have retained him and paid him a large salary for seven weeks without complaint or adverse criticism. I am therefore urged to the conclusion that the true interpretation of rule 6 is that the incompetency must be such as is produced from physical causes arising after the the contract is entered into.

“ Nor does the reason for discharge stated in the notice come within the provisions of the rule. The ground of dismissal is ‘not musically satisfactory to the board,’ not ‘ incompetency,’ and the dissatisfaction of the board is not tantamount to a finding of incompetency by the musical and vocal directors. I am well aware that, where a contract for service involving artistic or scientific qualities contains a proviso requiring them to be rendered to the satisfaction of the employer, the employment may be terminated at the mere will of the employer, and he can exercise the power to discharge arbitrarily, and when exercised there is no redress for the employé. See *Glenny*v. *Lacy*(1 N. Y. Supp. 513 ; 16 N. Y. St. Rep’r 798). In the contract here there is no provision of that kind. The cause allowed for discharge is ‘ incompetency,’ not dissatisfaction. The artist may be thoroughly competent, yet may not satisfy many persons in the rendition of his parts. ‘ Satisfaction ’ is an expression entirely unique in its application to artistic efforts, and I know of no word which can take its place, and will preserve to the employer the right to terminate a contract because he is not satisfied. It is a quality assumed to be possessed solely by the employer, not discoverable or ascertainable except bythe expression of the possessor. When acted upon it is conclusive upon the employé. Had it been intended to be made a provision of the contract in this case, it should have been expressed therein. As it is not so expressed it cannot now be injected or substituted for another word to preserve the company from liability. It has also been held that, until the satisfaction is determined by the party authorized to'act, it has no effect or force. Applying that rule to the present case, the contract makes the musical and vocal direc*466tors the judges as to .the incompetency. The board of directors of the company are inferentially the board referred to in the notice of discharge. Nothing in the contract gave them the right to determine the competency of the plaintiff, and he could only be discharged in accordance with the provisions of the contract, except under such other circumstances as would be sanctioned by law, for good cause shown.

“ The remaining question is as to whether the defendant is relieved from liability because he believed the annual report signed by him to be true when he signed it. It must be answered in the negative. The law required the defendant, as one of the directors of the company, to join in the annual report, and provided that he would be visited with personal liability for the debts of the corporation in the event of the report made by him containing statements false in any material fact. I have already shown that the annual report in which the defendant joined contained material false statements. It is no defense that he acted in good faith and under legal advice. (*Gardner*v. People, 62 N. Y. 299). It was held in that case •that where an act is prohibited by statute it is no defense ithat the party acted in good faith and under legal advice. The -evidence satisfies me that the defendant acted upon the advice of counsel and relied thereon, and that he did not intentionally sign the report knowing or believing it to be false. Judgment is directed for the plaintiff.”

From the judgment entered on this decision defendant appealed to the General Term of the City Court, which affirmed • the judgment; and from that decision defendant appealed to -this court.

*Nelson Smith,*for appellant.

*Isaac N. Falk,*for respondent.

Larremore, Ch. J.

The General Term of the City Court affirmed the judgment in plaintiff’s favor, without feeling .called upon to add anything to the very complete and satisfactory opinion delivered by the learned judge who tried the *467case without a jury. I have examined such opinion, and think that it considers and correctly disposes of every question both of law and fact. The judge found, as matter of fact, on sufficient evidence, that the report of the American Opera Company, signed by defendant as a director, was false in material particulars. As shown in such opinion, the defendant was clearly an officer of the company within the meaning of section 21 of the act of 1875, and therefore severally liable for debts •owed by it, at the time of the filing of such false report. The remedy against the corporation has been exhausted by judgment and execution, and the indebtedness established *de novo*in the present action. The case therefore comes clearly within the statute. Counsel for appellant claims that defendant’s personal innocence of fraudulent intent, his ignorance as to the truth or falsity of the statements made in the report, should operate as a valid defense. The authorities cited on this point in his elaborate brief are, in the main, cases of a criminal or *quasi*criminal nature, such as prosecutions for the sale of noxious drugs, or impure milk, or oleomargarine and the like. In all criminal proceedings guilty intent is the very gist of the matter, and naturally all the proof and discussion relate, directly or indirectly, to this central question. But these authorities have no application here. The act of 1875 does not make an infringement of its provisions a misdemeanor ; it grants a remedy by civil action. The purpose of the section under which this action was brought was to provide for the furnishing, by public records, of correct information as to the financial status of corporations. Its intent was, further, to put upon any person, who assumed to sign a report as an officer, the responsibility of ascertaining at his peril the truth or falsity of its contents, and to provide any individual, who might be misled by false information so promulgated, an indemnity for his loss, by action over against the fraudulent or negligent officers. The strictest and most literal construction could not obscure such legislative intent, and the case at bar is clearly an action of the class the framers of the section had in mind.

We think the learned judge correctly disposed of the de*468fense set up under rule 6 of the contract between plaintiff and the corporation. A portion of such rule is as follows :

“ In the event either of incompetency, or of such continued illness or decrease of physical or vocal faculties as to prevent one from doing service for a period of more than two weeks, thecompanj^ may in its discretion cancel or annul the contract with the party in question, without being subjected to any claims for damages. The vocal and musical directors shall be the sole judges of the fact and extent of the incompetency in applying this rule.”

“Incompetent” is certainly not a synonym for “unsatisfactory.” If the contract had provided that in case plaintiff proved “ unsatisfactory ” he might be summarily dismissed, the company would have been justified in dispensing with his services at any time, for any cause, or no cause (Glenny *v*. *Lacy,*1 N. Y. Supp. 513; 16 N. Y. St. Rep. 798). But where the reason given for the discharge is “ incompetency,” there must be something more than arbitrary caprice to authorize the act. One man may be more competent for a task than another, yet both may be competent. One vocalist may sing the baritone part of an opera better than another, yet neither be “ incompetent.” Webster illustrates the use of the word “ incompetent ” by the phrases “ in competency of a child for hard labor; ” “incompetency of a lunatic for intellectual labor.” In the sense suggested by such illustrations the plaintiff was not “incompetent” at all. A lunatic is not at all able to perform intellectual labor. Plaintiff had sung his parts acceptably, and received his salary without demur, for á póriod of seven weeks. This is undisputed, and, under such state of affairs it was clearly right to hold that some allegation and proof of facts tending to show actual “ incompetency ” was required, in order to sustain the action of the board. Although the vocal and musical directors are by the rule made the sole judges of the fact and extent of the “ incompetency,” the court will nevertheless assert the right of reviewing their action, in the interests of justice, where no facts appear which tend to render the charge of “ incompetency ” plausible. They could not make plaintiff “incompetent” by agreeing to *469pronounce Mm so. All the circumstances point to an attempt, through an ambiguous clause in the instrument, to get rid of an employé who was faithfully performing his contract, because it had become inconvenient to continue the payment of Ms wages.

The above additional remarks are to be taken in connection with the opmion of the trial judge, in the reasoning of which I concur.

The judgment appealed from should be affirmed, with costs.

J. F. Daly and Bischoff, JJ., concurred.

Judgment affirmed, with costs.

A motion for leave to appeal to the Court of Appeals from the judgment entered upon the foregoing decision was made at the succeeding General Term, and the following opinion was rendered thereon, May 5th, 1890.

Bischoff, J.

The questions presented on this appeal, while not entirely novel, having in the main been settled by the decisions of the highest appellate court of this state, yet present some features not clearly embraced within those divisions, and for the reason that the liability' of the defendant is highly penal, and that many other pending actions, arising out of the subject matter of this appeal, will in their result depend upon the adjudication in this case, I think that permission should be extended to the appellant to appeal to the Court of Appeals *(Jackson*v. Purchase, 1 Hilt. 357).

Larremore, Ch. J., and J. F. Daly, J., concurred.

Motion granted.