Case Name: William F. Marsh, Appellant, v. Sol L. Kaye, Individually and as Receiver of the Ladies' Deborah Nursery and Child's Protectory, et al., Respondents, Impleaded with Others
Court: New York Court of Appeals
Jurisdiction: New York
Decision Date: 1901-10-01
Citations: 168 N.Y. 196
Docket Number: 
Parties: William F. Marsh, Appellant, v. Sol L. Kaye, Individually and as Receiver of the Ladies’ Deborah Nursery and Child’s Protectory, et al., Respondents, Impleaded with Others.
Judges: 
Reporter: New York Reports
Volume: 168
Pages: 196–213

Head Matter:
William F. Marsh, Appellant, v. Sol L. Kaye, Individually and as Receiver of the Ladies’ Deborah Nursery and Child’s Protectory, et al., Respondents, Impleaded with Others.
1. Charitable Corporation—Liability of Directors for Debts. The character of the liability ior corporate debts, payable within a year, imposed upon directors of a charitable corporation organized under chapter 819 of the Laws of 1848 and continued under the Membership Corporations Law (L. 1895, ch. 559, § 31), where execution against the corporation has first been returned unsatisfied, is essentially the same as that of stockholders, under the various statutes regulating the incorporation of corporations, differing from the latter only in degree.
2. Equitable Action to Enforce Liability Mot Maintainable. While an action in equity to enforce the personal liability of the directors may be maintained on behalf of all the creditors, where such liability is limited in amount and the fund to accrue therefrom is inadequate to satisfy all the claims against the corporation, it cannot be maintained where the only thing to be reached is the personal liability of the directors, which is absolute and unlimited, and in no sense constitutes a fund to be protected or preserved for the creditors, or to be distributed among them, since an adequate remedy at law exists.
8. Multiplicity of Suits. Nor can such an action be maintained by one creditor on behalf of himself and all others against the receiver and all the directors on the theory that the corporation being insolvent and in the hands of a permanent receiver, multiplicity of suits is thereby prevented.
Marsh v. Kaye, 44 App. Div. 68, affirmed.
(Argued June 14, 1901;
decided October 1, 1901.)
Appeal from a judgment of t-lie Appellate Division of the Supreme Court in the first judicial department, entered December 12, 1899, affirming a judgment in favor of defendants entered upon a dismissal of the complaint by the court on trial at Special Term.
The nature of the action and the facts, so far as material, are stated in the opinions.
Henry D. Hotchkiss for appellant.
The liability of the directors is not penal, but contractual in its nature. [Rogers v. Decker, 131 N. Y. 490; Nat. Bank v. Dillingham, 147 N. Y. 603.) This action is maintainable on the theory of preventing a multiplicity of suits. (Story v. Furman, 25 N. Y. 214; Weeks v. Love, 50 N. Y. 568; Mathez v. Neidig, 72 N. Y. 100; Pfohl v. Simpson, 50 How. Pr. 341; 74 N. Y. 137; Bauer v. Platt, 72 Hun, 326; U. G. Co. v. Vary, 79 Hun, 103; 152 N. Y. 121; Bagley & Sewall Co. v. Ehrlicher, 8 App. Div. 581; Cochran v. A. O. Co., 20 Abb. [N. C.] 114; KJoons v. Martin, 143 N. Y. 672.) The receiver appeared and answered generally, without objection. The failure to obtain-leave to sue was not jurisdictional; the objection was open to a plea in abatement, and was waived by appearance and answer. (Hackley v. Draper, 4 T. & C. 614; 60 N. Y. 88; Hubbell v. Dana, 9 How. Pr. 424; Jay's Case, 6 Abb. Pr. 293; Knower v. Reynolds, 19 Wkly. Dig. 383.) The only object in joining the receiver as a party was to obtain an accounting and an equitable distribution of any assets in his nands, to the end that the directors might be held only for the deficit of assets, and that the entire controversy might be settled in this suit. (Hirshfeld v. Fitzgerald, 157 N. Y. 184; Jacquelin v. M. J. Assn., 39 App. Div. 515.) Plaintiff’s failure to obtain judgment and execution against the company was fully excused. (Hunting v. Blum, 143 N. Y. 511; Hirshfeld v. Bopp, 27 App. Div. 180; 145 N. Y. 84.)
Harold Nathan for Kathan Hutkoff, respondent.
The liability of directors of a membership corporation for the debts of the corporation, under the statute, is a primary and original liability, enforceable in an action at law, and no such secondary or limited liability exists- as authorizes a resort to equity. (L. 1895, ch. 559, § 11; L. 1896, ch. 542; Rogers v. Decker, 131 N. Y. 490; 62 Hun, 15; Corning v. McCullough, 1 N. Y. 47; Queenan v. Palmer, 117 Ill. 619; O'Brien v. Fitzgerald, 143 N. Y. 377.) The allegation in the complaint with respect to a multiplicity of suits is insufficient to support this action. (O'Brien v. Fitzgerald, 6 App. Div. 509; E. S. S. Bank v. Beard, 151 N. Y. 638; Dykman v. Keeney, 154 N. Y. 483; Dodd v. City of Hartford, 25 Conn. 232; Wilkerson v. Walters, 1 Ida. 564; Youngblood v. Sexton, 32 Mich. 406; Merrill v. Lake, 46 Am. Dec. 377; Howell v. City of Buffalo, 2 Abb. Ct. App. Dec. 412; Town of Venice v. Woodruff, 62 N. Y. 462; Fellows v. Spaulding, 141 Mass. 89.) The plaintiff lias an adequate remedy at law, and, therefore, the discretion of the Supreme Court in refusing equitable intervention merely to avoid a multiplicity of suits at law, cannot be reviewed by this court. (Dunckel v. Dunckel, 141 N. Y. 427; N. & N. B. Ilosiery Co. v. Arnold, 143 N. Y. 265; Wormser v. Brown, 149 N. Y. 163.). The court properly dismissed the complaint instead of retaining the action for the purpose of awarding legal relief. (Dudley v. Congregation T. O. of St. Francis, 138 N. Y. 451; Dalton v. Vanderveer, 8 Misc. Rep. 484; Bockes v. Lansing, 74 N. Y. 437; Ketchum v. Depew, 81 Hun, 278; Vincent v. Moriarty, 31 App. Div. 484; Hawes v. Dobbs, 137 N. Y. 465; Sherburne v. Taft, 142 N. Y. 619.)
Samuel Greenbaum for Rose Herschmann et ah, respondents.
The complaint does not state a cause of action against the directors of the Ladies’ Deborah 24ursery and Child’s Protectory, because of its omission to show when the debt of the plaintiff’s assignor became due. (Barnes v. Wheaton, 80 Hun, 8; Austin v. Goodrich, 49 N. Y. 266; Bartlett v. Crozier, 17 Johns. 457; Hirshfeld v. Bopp, 145 N. Y. 97; Hardman v. Sage, 124 N. Y. 35.) The complaint does not affirmatively show that the Ladies’ Deborah Hursery and Child’s Protectory was not a corporation included within the class excepted by the statute. (Terry v. Little, 101 U. S. 216 Rowell v. Janurin, 151 N. Y. 61; Wilson Mfg. Co. v. Schwind, 5 Misc. Rep. 205; Hirshfeld v. Bopp, 145 N. Y. 84; Griffeth v. Green, 129 N. Y. 517.) The complaint should have been dismissed for the reason that there is a defect of parties defendant. (Dean v. Whiton, 16 Hun, 203.) This action is not maintainable on the theory of preventing a multiplicity of suits. (Nat. P. Bank v. Goddard, 131 N. Y. 503.).

Opinion:
Cullen, J.
I agree with Judge Bartlett in the view that the liability of the directors in this action is essentially the same in character as that of stockholders under various statutes regulating the incorporation of corporations, differing from the latter only in degree. -So far as the Appellate Division seems to have entertained a different opinion, I think that learned court erred. But this concession does not lead to the conclusion that the court below erred in its decision. It cannot be questioned that under the statute the defendant directors became personally liable for the debts they contracted on behalf of the corporation payable within a year, provided that an execution was first returned unsatisfied against the corporation, and that this liability can be enforced against them in an action at law to the same extent and in the same manner as any debts they may personally have incurred. The question is, does an action in equity lie to enforce this liability brought by one creditor on behalf of himself and all others against all the directors. While undoubtedly resort may often be had to equity to enforce legal obligations, still it is the rule that a court of law is primarily the proper forum for such litigation, and that resort to equity can be had only where the remedy at law is inadequate or will lead to inequitable results. It is, therefore, incumbent on the plaintiff to show why an equitable action is necessary' to secure his rights. Where the liability of the stockholders or directors is limited in amount and the fund to accrue from such liability may be inadequate to satisfy all the claims against the corporation, an action in equity on behalf of all the creditors, in which the fund can be applied ratably on all claims, is absolutely necessary to secure equality. The opinion delivered by the present chief judge of this court (then in the Supreme Court) in Bauer v. Platt (72 Hun, 326) discusses this question at length and the decision in that case proceeded on the ground of the limited liability of the directors and stockholders. The case was unquestionably properly decided. But it has no application to the one now before us. There is no fund to be distributed among the creditors except such as may proceed from the conversion of the assets of the corporation. No protection for those assets is required. The court has already in an appropriate action appointed a receiver, and the fund will be distributed in that action, not in this. The only thing to be reached in this action is the personal liability of the directors, which is absolute and unlimited. This in no sense constitutes a fund to be protected or preserved for the creditors or to be distributed among them. The status of these- creditors of the corporation, and, therefore, creditors of the directors, does not differ from that of other creditors of the directors jjersonally. While in a certain broad sense it may be said that every man's property is a trust fund for the payment of his debts, no action in equity has ever been maintained by a creditor at large to seize and administer the estate of a debtor for the benefit of creditors generally. Bankruptcy proceedings are the only means to attain such an object. If this action is sustained the court may, doubtless, restrain proceedings against the directors by the creditors of the corporation, but surely it cannot enjoin the other creditors of the directors. The defendant directors, if they are of insufficient responsibility, may, therefore, voluntarily apply all their property to the payment of other creditors, or, while this action is progressing, such property may be seized by those creditors under legal proceedings. Meanwhile creditors of this class are tied hand and foot. Usually the intervention of equity is invoked in aid of the creditor. In this case an equitable action would serve no useful purpose and in no way' aid the creditors on whose behalf it is brought, but, on the contrary, put them at a marked disadvantage as compared with other creditors. Nor is the action necessary to protect the directors. There can be no apportionment of liability between the directors, for each is liable for all debts, not for his share of them. An action in equity could be maintained by one director who had paid obligations of the corporation against his co-directors for contribution, an action in which there would be an account taken of all payments made by any of the parties. No such relief can be granted here, for judg ment must go against all the directors for the total amount of the debts.
I have not discussed the question whether this suit can be maintained to prevent a multiplicity of actidns, as I think that point is disposed of by the recent decisions of this court in O'Brien v. Fitzgerald (143 N. Y. 377); Empire State Savings Bank v. Beard (151 N. Y. 638), and Dykman v. Keeney (154 N. Y. 483). In those cases it would have been a distinct and manifest advantage to the plaintiff to be able to maintain the action. Yet this court thought the plaintiff must be confined to his remedy at law. Here, as I have shown, the maintenance of the action, instead of being beneficial to the creditors, will be palpably injurious to them.
The judgment of the Appellate Division should be affirmed, with costs.