Case Name: Wheeler et al. v. Faurot
Court: Supreme Court of Ohio
Jurisdiction: Ohio
Decision Date: 1881-01
Citations: 37 Ohio St. 26
Docket Number: 
Parties: Wheeler et al. v. Faurot.
Judges: 
Reporter: Ohio State Reports, New Service
Volume: 37
Pages: 26–30

Head Matter:
Wheeler et al. v. Faurot.
t. An action was brought by a creditor of an insolvent corporation to enforce the individual liability of those who were stockholders at the time his debt was contracted. Two of the defendants set up the fact, that prior to the time the plaintiff obtained his judgment against the corporation, they had sold and transferred their stock to N. and O.,who were solvent and amenable to process, and whom they prayed might be made parties to the action and by proper process brought into court. This prayer the court refused to grant.
Held, that said assignees were necessary parties to a final determination of the rights and liabilities of all the parties interested, and in refusing an order to make them parties the court committed error.
2. Where the liability of a defendant depends on whether a promissory note was an outstanding security at a certain date, an averment in his answer that prior to said dale the note had been paid by a new note of the same maker, is sufficient on demurrer.
Error to the District Court of Allen County.
The original action was brought by the defendant in error against the plaintiffs in error, John Wheeler and D. J. Shuler, and others, to enforce their statutory liability as stockholders in the Lima Wheel Company, a corporation duly organised under the laws of this state, in 1871. On October 25, 1875, a judgment was rendered against the company in favor of Faurot for the sum of $13,102.96, on five promissory notes of the company, two of which were dated in October, 1874, and the remaining three in November of the same year, each falling dne in ninety days from its date. After exhausting the assets of the company there still remained due on the judgment the sum of $8,500, with interest from December 23, 1875. Wheeler was an original subscriber to the stock in the sum of $500, and Shuler in the sum of $1,000: each had paid up his stock in full.
Wheeler and Shuler answered, among other things:
“ That on the-day of December, a. d. 1874, and while said company was carrying on business, and at a period more than six months prior to the suspension of business by said company, they in good faith and for valuable considerations sold and transferred the stock by them respectively owned in said corporation to other persons, to wit: The defendant Shuler to one J. A. Newell, and the defendant Wheeler to one George W. Overmyer, both of said parties being then and now residents of Lima, Ohio, solvent and responsible. And defendants say that their said sales and transfers were reported to and recognized and confirmed by said corporation, the certificate of stock by these defendants, then held, returned to and canceled by said corporation, and new certificates issued by said corporation to the said Newell and Overmyer for the respective amounts of stock so by them purchased.” ■
The defendants prayed that said Newell and Overmyer might be made parties defendant, and charged with the liability sought to be enforced against these defendants.
As a second defense these defendants further answered:
“ That they are informed and believe and so aver that the said indebtedness in favor of said plaintiff, and on account of which his judgment was obtained as set out in his said petition, was originally evidenced by the promissory notes of said corporation of the dates and for the amounts set out in said petition ; that after these defendants ceased to be members and stockholders in said corporation, said notes were canceled and paid by the execution of new notes by said corporation, duly signed by the officers thereof, and at dates subsequent to the time that these defendants ceased to be members and stockholders of said corporation, and that said plaintiff by collusion with the officers of said corporation, and with the intent to wrong and defraud these defendants, obtained the notes that had been paid and canceled as aforesaid and procured his judgment upon them against said corporation on cognovit and without process, which said judgment is wholly void as against these defendants.”
A demurrer to each of these defenses was sustained in the common pleas, and judgment given for' the plaintiff. On appeal the district court gave a like judgment.
To reverse this judgment is the object of the present proceeding in error.
Hughes & Bobh, for plaintiff in error.
Gunnvngham c& Brotherton, for defendant in error.

Opinion:
Boynton, O. J.
Although the fact is not stated, we assume that the Lima Wheel Company was incorporated under the general act of incorporation of 1852. Under the provisions of section 78 of that act, the plaintiffs in error became liable to an amount equal to their respective shares of stock, in addition thereto, to secure the indebtedness of the company which accrued while they were the owners of such stock. Brown v. Hitchcock, 36 Ohio St. 667. But while the liability attached to them as stockholders for the payment of the judgment rendered against the company upon a debt created during their ownership of the stock, when they sold and transferred their respective shares to Newell and Overmyer, the latter assumed and became as fully bound to discharge the liability, as between themselves and their assignors, as if they had owned the stock from the organization of the company. Ibid.
Hence, Nowell and Overmyer were necessary parties to the action. A complete and final determination of the rights of all the parties could not be made without them. They were not only liable to the plaintiff by reason of their purchase of the stock, but they stood in the relation of indemnitors to Wheeler and Shuler against their liability to the creditor, which attached to their ownership of the stock at the time the debt was contracted. Beiug ultimately liable and solvent, and the action being one in equity, to marshal the liabilities of all the stock holders, inter sese as well as to the creditors, it was a right which Wheeler and Shuler had to have them brought into court to the end, that when the final judgment was entered, the rights of all persons interested in the matter, as well as the object of the suit, should be adjudicated and settled, and all further litigation thereby avoided. Umsted v. Buskirk, 17 Ohio St. 113. We therefore think the court erred in refusing to make Newell and Overmyer parties to the action.
Wo also think the court erred in sustaining the demurrer to the second defense of the answer. The authorities are not in accord upon the point, whether the mere renewal of the note of the corporation is to be regarded as the making of a new contract as respects the stockholders whose individual liability is sought to be enforced. That the renewal has the effect of creating a new debt and the extinguishment of the old one, in the absence of proof showing a different understanding, was held in Castleman v. Holmes, 4 J. J. Marsh. 1; Milliken v. Whitehouse, 49 Me. 527; and Fisher v. Marvin, 47 Barb. 159.
See also Thompson's Liability of Stockholders, § 101, 298. This doctrine, however, was denied in Parrott v. Colby, 6 Hun, 55, and in Jagger Iron Co. v. Walker, 43 N. Y. S. C. 275, where it was held, that so long as the debt for which the note was given remains unextinguished, the liability of stockholders continues and "is in respect thereof only." We need not determine which line of authorities is supported by the better reason, nor whether the renewal of a note of a corporation as respects its effect upon the individual liability of the stockholders has im operation on the antecedent debt different from that resulting from the renewal of a note of a private individual. The answer averred, that after Wheeler and Shuler ceased to be stockholders, the notes upon which the judgment was rendered were canceled and paid by the execution of new notes by the corporation. It is well settled that where the parties agree that a new note shall be taken in payment of the debt for which it is given, or shall extinguish all liability on the note for which it is substituted, such antecedent debt or note is thereby paid and the right of action thereon is gone. Merrick v. Boury, 4 Ohio St. 60 ; Leach v. Church, 15 Ohio St. 169. Here the averment was that the notes were canceled and paid by new notes given by the corporation and subsequently fraudulently obtained and put into judgment. It may be that the pleader only intended to state the fact of renewal, and to claim therefor that it operated in law as payment of the notes for which the new notes were given.
But the averment is clearly susceptible of the meaning that the parties agreed that. the new notes should be accepted in payment of the old ones ; and hence in view of the requirement, that in the construction of a pleading for the purpose of determining its effect, its allegations are to be liberally construed with a view to substantial justice between the parties, the demurrer to the defense by which such payment was averred should have been overruled and if the pleading was not ordered to be made more definite and certain, and the fact of payment was controverted, issue should have been joined by reply.
Judgment reversed and canse remanded for further proceedings.