Opinion ID: 768610
Heading Depth: 2
Heading Rank: 2

Heading: Shareholder Liability under Section 628

Text: 38 Carr is also incorrect insofar as she maintains that Section 628 does not create liability. Section 628(a) states that a shareholder remains liable to the corporation for the unpaid portion of the stock price, and at least one New York court has recognized that this provision does indeed create liability. See Chrysler Corp. v. Fedders Corp., 73 A.D.2d 504, 507, 422 N.Y.S.2d 876, 880 (1st Dep't 1979) (Coordinately, [defendant corporation] could also recover [on its counterclaim] under BCL § 628(a) for the unpaid portion of the subscription price shown to be due [to it].). Thus, if Carr currently owns Marietta shares, she remains liable under Section 628(a) to the corporation for the unpaid portion of the subscription price. In order to escape this liability, Carr bears the burden of demonstrating that she satisfies the requirements of Section 628(b) by virtue of having taken the Walsh shares in good faith and without notice or knowledge that the shares were not fully paid for. 39 To the extent that Carr argues that Section 628 does not create any affirmative liability, but instead merely cabins the liability of a shareholder for corporate debts, we reject this argument as well. Our understanding of Section 628 is illuminated by an examination of the common law as it existed before the enactment of Section 628. At common law, a person who acquired stock for which the issuing corporation had not been fully paid was liable to the corporation for the original purchaser's deficiency. See Pullman v. Upton, 96 U.S. 328, 330-31 (1877) (Mem.) (holder of stock, who possesses stock as collateral security, is liable to corporation for unpaid portion of share price); Webster v. Upton, 91 U.S. 65, 70 (1875) (Mem.) (We think, therefore, the transferee of stock in an incorporated company is liable for calls made after he has been accepted by the company as a stockholder, and his name has been registered on the stock books as a corporator; and, being thus liable, there is an implied promise that he will pay calls made while he continues the owner.). The common law imposed upon the shareholder an implied promise to satisfy any unpaid portion of the stock purchase price upon the corporation's demand. See Sigua Iron Co. v. Brown, 171 N.Y. 488, 502-04, 64 N.E. 194, 198-99 (1902) (shareholder responsible for unpaid portion of share price because of implied promise inherent in becoming shareholder). Additionally, at common law, a transferee of unpaid shares became liable to the corporation for the unpaid portion of the subscription price, even if the transferee was not aware that the corporation was still owed money for the shares. Early v. Richardson, 280 U.S. 496, 499 (1930); Harr v. Wright, 164 Misc. 395, 397, 298 N.Y.S. 270, 272 (N.Y. Sup. Ct. 1936), aff'd, 250 App. Div. 830, 296 N.Y.S. 463 (4th Dep't 1937); Dayton v. Borst, 31 N.Y. 435 (1865). 40 By enacting Section 628, the New York legislature limited the common law liability of a shareholder to the corporation and the corporation's creditors to the total value of the shareholder's committed investment. See N.Y. Bus. Corp. Law § 628 Legislative Studies and Reports (McKinney 1986). In Section 628, the legislature included protections for individuals who received securities from other individuals either as pledgees or as transferees without knowledge that money was still owed the corporation for the shares. See N.Y. Bus. Corp. Law § 628(b) (providing protections for innocent transferees of shares for which money is still due the corporation). In order to protect creditors who acquired shares as collateral security, the New York legislature enacted Section 628(c). Thus, in light of the plain reading of Section 628, its legislative history, and the common law, which all suggest that Section 628 creates liability, Carr cannot escape liability under the statute unless she can bring herself within the protections of Section 628(b) or (c). Because Carr does not currently hold the Walsh Shares as collateral security and is not a pledgee, Section 628(c) does not relieve her of liability. Carr makes no argument that Section 628(c) does apply, and she therefore must satisfy the provisions of Section 628(b) to escape liability. 41