Case Name: John McDowall, Resp't, v. Cornelius Sheehan, App'lt
Court: New York Court of Appeals
Jurisdiction: New York
Decision Date: 1891-12-01
Citations: 41 N.Y. St. Rep. 415
Docket Number: 
Parties: John McDowall, Resp’t, v. Cornelius Sheehan, App’lt.
Judges: 
Reporter: New York State Reporter
Volume: 41
Pages: 415–419

Head Matter:
John McDowall, Resp’t, v. Cornelius Sheehan, App’lt.
(Court of Appeals,
Filed December 1, 1891.)
1. Mantxfactubino companies — Laws 1848, chap. 40, § 10 — Who abe CBEDITORS.
The “creditors” to whom the stockholders of a manufacturing corporation are liable until the whole amount of the capital stock is paid in and a certificate made and recorded, are the outside creditors dealing with it'and trusting it and generally ignorant of its precise financial condition.
2. Same.
The statute should not be so construed that the directors of a moribund corporation could constitute themselves creditors for salaries or wages and thus impose liabilities upon confiding and innocent stockholders.
Appeal from judgment of the supreme court, general term, third department, affirming judgment in favor of plaintiff.
J. W. Crane, for app’lt; Charles S. Lester, for resp’t.
Reversing 36 St. Rep., 104.

Opinion:
Earl, J.
In May, 1887, a corporation called the Saratoga Union was organized under the general manufacturing act of 1848 and the acts amending the same, for the purpose of publishing a newspaper in Saratoga Springs. The certificate of incorporation was signed and acknowledged by Benjamin F. Judson, Edmund J. Huling, John W. Howe, E. F. Knapp and the plaintiff, who thus became the incorporators, and they were named in the certificate as the trustees for the first year. On the tenth day of June thereafter, at the first meeting of the incorporators, Huling was chosen president of the" corporation, the plaintiff vice-president and Judson treasurer and general manager, neither of such persons at the time being stockholders or subscribers for stock. Prior to the incorporation the plaintiff and Judson, who were-relatives, were engaged in business together. They were the chief promoters of the incorporation and one of the purposes-for forming the corporation was to give them employment. Immediately after the corporation was launched, the plaintiff was employed as the editor of the newspaper and he assisted, in carrying on and managing the same, and his compensation, fixed by Judson and himself, was twenty dollars per week. The business of the corporation was carried on until October, 1888,, when it became insolvent, and it thereafter ceased to do any business. During all that time, seventy-three weeks, the plaintiff continued in the employment of the corporation, and received to apply upon his stipulated compensation only twenty dollars, the payment for one week's service. During that time he continued vice-president and a director of the corporation and he attended all the meetings of the directors and was active in the management of the corporation. In July, 1887, he was present at a meeting of the directors at which it was resolved to mortgage all the property of the corporation to secure a person for endorsing a note for it. In February, 1888, he was present at a meeting of the directors at which it was resolved that the corporation should execute to Mrs. Judson a mortgage covering " the franchises, property, rights, liberties, presses, engine and boiler, folder, type, type-cases, furniture and all property owned by the corporation, except paper and ink," to secure her for $7,000. At the same meeting it was resolved that the secretary be authorized and directed to execute to Mrs. Judson an assignment or conveyance of the Associated Press franchise-owned by the corporation as additional security for the same-sum. In July, 1888, at another meeting of the directors at which plaintiff was present, it was resolved that the corporation hire from Mrs. Judson the presses, material and type comprising its-job office department, at the rate of $100 a year.
The capital stock of the corporation specified in the certificate filed was $10,000, divided into shares of $100 each. The capital was never all subscribed for or paid in, and no certificate was made as required by § 10 and 11 of the act of 1848. The plaintiff brought an action against the corporation to recover the amount due him as a creditor thereof, and he recovered judgment and issued execution thereon which was returned wholly unsatisfied. He then commenced this action to enforce the liability of the defendant as a stockholder, under § 10 of the act, which provides that all the stockholders of such a corporation shall be severally individually liable to the creditors thereof, to an amount equal to the amount of stock held by them respec lively for all debts and contracts made by the corporation, " until the whole amount of capital stock fixed and limited by such company shall have been paid in and a certificate thereof shall have been made and recorded as prescribed in the following section."
The defendant's relation to the company grows out of the following facts : Before the corporation was formed he was solicited to take stock therein, and he promised to aid the enterprise. In May, 1887, before the certificate of incorporation was filed, he went to Judge Putnam and made his check payable to his order for the sum of $1,000, stating to him that he designed it as a gift to help the enterprise, and directing him not to pay the amount to the corporation until he, the defendant, would not incur any further liability. The defendant did not part with the check with any other or different intention than that expressed in his directions to Putnam, and Putnam intended to aid the enterprise in a similar manner by advancing the sum of $500 on the same or similar terms. Previous to the 7th day of July, 1887, Judson, the director above named, went to Putnam and stated and represented to him that eighty-five shares of the capital stock had been subscribed, or paid for, whereas there had not then been any of it subscribed or paid for. Putnam believed the statement to be true and communicated it to the defendant, and thereafter on the 7th day of July he made his check, with the assent of the defendant, to the order of the plaintiff for the sum of $1,500, which check included the check left with him by the defendant as above stated. Putnam then received two certificates of stock which had on that day been made out to the plaintiff, one for $1,000 and the other for $500, each of which contained on the back thereof a blank assignment signed by the plaintiff. Putnam would not have parted with the check if he had not believed the statements made to him by Judson to have been true. The defendant did not learn of the falsity of the statements upon which the check was procured until after the commencement of this action. The-plaintiff voted on the stock the same after as before the blank assignment thereof, and continued to act as such stockholder so long as the corporation existed; and the certificate of stock continued in his name on the stock book of the corporation the same after as before the assignment, and the defendant's name never was entered on the book in any manner. It does not appear that the plaintiff personally had the benefit of the $1,500 paid by Putnam, and he never held the certificates of stock made out to him except to sign his name to the blank assignment on the back thereof, and he never had any other stock in the corporation. After the certificate for the ten shares was delivered to Putnam, he sent or delivered it to the defendant, by whom it was laid away. The defendant never attended any meeting of the stockholders, and never acted as a stockholder and never received any notice of a meeting of the stockholders.
It is apparent from these facts that the plaintiff's recovery against-the defendant is very inequitable,and we believe the law will not up hold it. While the language of § 10 of the act of 1848 is broad and general that all stockholders of such a corporation shall be liable to creditors thereof to the amount of the stock held by them respectively, for all debts and contracts made by the corporation, until the whole amount of its capital stock shall have been paid in, and the proper certificate shall have been made and recorded, who are meant by " the creditors of the company ?'' That is the question now to be answered.
It is provided in § 2 of art. 8 of our state constitution that dues from corporations shall be secured by such individual liability of the corporators and other means, as may be prescribed by law." Can it be supposed that the framers of the constitution in drafting this section had in mind " dues " to the directors of corporations, and that the directors were objects of their solicitude whose protection should be guaranteed by the fundamental law ? In 1846 private corporations for all kinds of ends were rapidly increasing in this state, and the statesmen of that day thought it wise and sound public policy that the creditors of such corporations should in some cases and to some extent have, besides the corporate responsibility, some security in the individual liability of the corporators. But that public policy plainly had reference to outside creditors of a corporation dealing with and trusting it and generally ignorant of its precise financial condition. It could have no relation to the creditors of a corporation who manage its affairs and can generally know its condition, who create the debts and can generally protect themselves if creditors before disaster overtakes them. The constitutional provision and the laws enacted to give effect to the policy embodied therein were not intended for the protection of the debt makers, directors, who constitute themselves creditors of the corporation and then attempt to unload their burden upon stockholders whose interests were committed to their hands. We think by the fair construction of the language used in § 10 the debt makers are excluded from its scope, as well as from the policy which it was intended to promote. Suppose the whole capital stock of this corporation had been paid in, but the certificate had not been made and recorded,the plaintiff would still have been a creditor,but would it be contended that he would still be entitled to the protection intended by the section to be secured to the creditors of the corporation? If not, why would it not? We answer, simply because the word " creditors," as there used, does not include a creditor thus situated. Even if such a creditor can be fairly said to be within the general language used, he is clearly without the policy of the law, and so plainly not within the intention of the law makers that the law should be held not to cover his case; and for this view of the statute the case of Riggs v. Palmer, 115 N. Y., 506 ; 26 St. Rep., 198, is ample authority.
The statute should not be so construed that the directors of a moribund corporation could constitute themselves creditors for salaries or wages and thus impose liabilities upon confiding and innocent stockholders.
The plaintiff having been named as a trustee in the certificate of incorporation, could legally act as trustee, although he did not, in fact, own any stock. Davidson v. Westchester Gas Light Company, 99 N. Y., 558. But, in any event, having acted as a director and enjoyed all the privileges and advantages of that position, and wielded its powers for the purpose now in hand, he must be held a director.
We have assumed, as we ought, upon the findings of the trial term, that the defendant, under all the circumstances, holding the certificate of stock, became the legal and equitable owner thereof, and that thus he would have been liable to what we have termed the outside creditors of the corporation. Johnson v. Underhill, 52 N. Y., 203.
Our conclusion, therefore, is that the plaintiff must be defeated in his action solely because he was a director of the corporation and thus not entitled to the protection which the law intends to secure to the creditors of such a corporation; and as this ground of defense is fundamental and cannot be obviated by any proof which it seems possible for Mm to furnish, we can perceive no purpose to be served by a new trial.
The judgment should, therefore, be reversed and the complaint-dismissed, with costs.
Finch, Peckham and Gray, JJ., concur; Ruger, Ch. J., Andrews and O'Brien, JJ., not voting.