Court Opinion

ID: 3605754
Source: CourtListenerOpinion
Date Created: 2016-07-05 23:51:16.315884+00
Date Added: 2024-06-11T14:07:28.173943
License: Public Domain

The defendants, indicted for the crime of participating as directors in the fraudulent insolvency of a moneyed corporation, attack the indictment on the ground that section 297 of the Penal Law, which makes the acts charged criminal, is invalid and unconstitutional. That section provides in part that
"Every director of a moneyed corporation who:
"1. In case of the fraudulent insolvency of such corporation, shall have participated in such fraud * * *
"Is guilty of a misdemeanor, if no other punishment is prescribed therefor by law."
The Legislature has not left to the court the definition of what constitutes a "fraudulent insolvency." It has *Page 476 
provided in the same section that "The insolvency of a moneyed corporation is deemed fraudulent unless its affairs appear upon investigation to have been administered fairly, legally and with the same care and diligence that agents receiving a compensation for their services are bound, by law, to observe."
We are told that this provision is not a definition but the creation of a presumption. A definition it certainly is, even though it may include a presumption. It gives a content to the words "fraudulent insolvency" which those words might not otherwise have. It marks the line which divides innocent insolvency from fraudulent insolvency. True, its language is open to the contention that the Legislature intended also that the insolvency of a moneyed corporation should give rise, in the absence of evidence to the contrary, to the presumption that the insolvency is fraudulent. The Legislature cannot, it is said, create such a presumption. (Manley v. Georgia, 279 U.S. 1.)
We may assume that this provision does attempt, not merely to define "fraudulent insolvency," but to create a presumption of fraud from the insolvency itself. As Chief Judge CARDOZO has pointed out, it is a re-enactment of a like provision in the Revised Statutes of 1829. There it certainly was intended to include a presumption, for it was followed by another clause, "and it shall be incumbent on the directors and stockholders of every such insolvent corporation to repel by proof the presumption of fraud." Then definition and presumption were to be applied, not in the determination of penal liability but of civil liability and that, too, of a civil liability which might be incurred, at least by a stockholder, without fault on his part. "If the monies remaining due to the creditors of a corporation whose insolvency shall be adjudged fraudulent after the distribution of its effects shall not be collected in whole or in part from the directors liable for their reimbursement, the deficiency shall be *Page 477 
made good by the contribution of the stockholders of the company." (Revised Statutes of 1829, Part I, ch. XVIII, tit. II, art. 1, § 14.) The provisions for civil liability of directors or stockholders in case of fraudulent insolvency were repealed in 1830 and with them the definition of fraudulent insolvency and the presumption, in the absence of evidence to the contrary, that an insolvency is fraudulent. The provisions for civil liability have never been re-enacted, but the clause, now under consideration, reappeared in section 604 of the Penal Code of 1881, from which section 297 of the Penal Law is derived.
It reappeared, but, as has been pointed out, without the additional clause "and it shall be incumbent on the directors and stockholders of every such insolvent corporation to repel by proof the presumption of fraud." The reason for the omission seems to me plain. Under the provisions of the Revised Statutes civil liability of a stockholder followed upon adjudication of fraudulent insolvency and the Legislature intended that the burden of producing evidence to show that an insolvency was not fraudulent should rest upon the defendant. In the Penal Law of New York, if the presumption, though arbitrary, is applied in full rigor, it would establish only the "fraudulent insolvency;" the People must still prove that the defendant as such director has "participated in such fraud." Participation cannot be proven without designation and proof of the specific acts in which the defendant participated. Practically the force of the provision under consideration is confined to the definition of what circumstances render the insolvency fraudulent. Designation and proof of the specific acts of fraud in which the defendant participated leaves little, if any, scope for the application of a general presumption that the insolvency was fraudulent. At most the Legislature has retained vestiges of an invalid presumption. Severance of the invalid from the valid may certainly be made in such case. *Page 478 
The question remains whether the statute, including the definition, imposes a standard of conduct too vague to give warning to directors of the rule to be obeyed. Though I cannot agree in whole with the construction placed in the prevailing opinion upon the statute, my own construction leads in this particular case to the same result. The statute punishes a director who "participates" in fraud which has resulted in the insolvency of a moneyed corporation. It defines what is meant by a "fraudulent insolvency," by specifying the conditions which will give to an insolvency a fraudulent quality. That definition determines the meaning of the word "fraud," as used in the statute. It does not in my opinion determine what shall constitute participation by a director. It is said that, perhaps, the provisions of the statute might be construed as if they read: "The insolvency of a moneyed corporation is fraudulent when it results from the failure of a director to administer its affairs fairly, legally and with the same care that agents receiving a compensation for their services are bound by law to observe, and the burden of proof shall be on the director, when insolvency is proved, to show that it was not fraudulent or that he did not participate in the fraud." I cannot find in the language or in the history of the statutory provision any basis for that construction. Perhaps, if the Legislature had seen fit to enact a statute which bears such a construction we might give it partial effect by severance of the invalid from the valid, as pointed out in the prevailing opinion. That I do not now consider. If the statute is given, as I think it should be, a more literal construction, claims of invalidity lose much of their force.
I have said that, while the court might, perhaps, find implicit in the definition of "fraudulent insolvency," a presumption, arising from proof of insolvency, that the insolvency was fraudulent, I cannot find that a further presumption is implied or expressed that a director, who might be charged with such offense, has "participated" *Page 479 
in that fraud. So now I say that I do not find in the language of the statute any intention that the definition of "fraudulent insolvency" was intended to define the acts or omissions of a director which might constitute participation in such fraud or to provide that a failure, while acting as a director, to use the "care and diligence that agents receiving a compensation for their services are bound, by law, to observe," shall as matter of law constitute participation by a director in such fraud.
At the outset I wish to point out again that in the Revised Statutes of 1829 the definition of fraudulent insolvency might from the basis for the imposition of a civil liability upon stockholders regardless of their fault. There, certainly, the liability was not confined to insolvency resulting from fraud of the directors. Such a construction I think would have been a perversion of the language of the statute. Corporate affairs are conducted by corporate agents. Where the agents of a moneyed corporation fail to conduct them honestly and legally and
generally "with the care and diligence that agents receiving compensation for their services are bound, by law, to observe," the Legislature decreed that creditors may if necessary be reimbursed by contribution exacted from the stockholders. Quite evidently the Legislature intended such contribution might be exacted from stockholders if the agents were faithless even though the directors may have been without fault.
In re-enacting this provision as part of a penal statute applicable to directors alone, it seems to me that the Legislature can hardly have intended to change the meaning of its definition of "fraudulent insolvency" without changing its formulation. "Fraudulent insolvency," with participation of a director, received new consequences, but the meaning of "fraudulent insolvency" remained unchanged. The question, however, still remains whether the Legislature intended that the definition of what constitutes fraud in the insolvency of a *Page 480 
moneyed corporation shall also define the standard of conduct of a director who would avoid the charge of participation in the fraud.
The statute does not say so. Where do we find in the statute ground for holding that it is implied? Can we, indeed, apply to the conduct of a director the statutory standard of the "care and diligence that agents receiving a compensation for their services are required, by law, to observe?" It is said that this imposes upon a director the standard of "reasonable care" — the same standard which a director must observe to escape civil liability — in other words, that imprisonment and disgrace as well as civil liability may be visited upon a director who fails to exhibit in the performance of his trust "the same degree of care and prudence that men prompted by self-interest generally exercise in their own affairs." They are to be visited with fines and penalties if they fail to comply with their undertaking not only "that they would discharge their duties with proper care, but that they would exercise the ordinary skill and judgment requisite for the discharge of their delicate trust." (Hun v.Cary, 82 N.Y. 65, 71, 74.)
Perhaps the Legislature may impose such a standard of conduct upon a director. Perhaps the Legislature may give warning to a director that such a rule must be obeyed. I cannot find that the Legislature has done so. It is said that any act which comes within the statutory definition of fraud must constitute participation in the fraud. That is of course true, but it does not at all follow that the definition of fraud is coextensive with what may constitute "participation" in the fraud. Doubtless, where the director acts as the agent of a bank he may be found guilty of participation in the "fraudulent insolvency" of the bank resulting from his failure as agent to conduct the affairs of the bank with the same care and diligence which might reasonably be expected of a paid agent. There we have a well-defined, well-understood *Page 481 
standard of conduct of an agent — not too vague to be applied in determining penal responsibility. "The board of directors of a corporation do not stand in the same relation to the corporate body which a private agent holds toward his principal." (Hoyt
v. Thompson's Executors, 19 N.Y. 207, 216.) A fortiori an individual director is not an agent. He is a member of a corporation directing the conduct, through others, of the corporate affairs. If the Legislature intended to give warning to a director that any negligence which would give rise to civil liability would also create penal responsibility, it failed to say so in clear terms. The test of the "care and diligence thatagents receiving a compensation for their services are bound, by law, to observe," is hardly a test which gives warning to a director, not acting as an agent, that at peril of his liberty he must as director bestow upon the affairs of his corporation the care and prudence which men ordinarily exercise in their own affairs. Though I find the language of the statute sufficiently definite if the definition of fraudulent insolvency applies to the conduct of the affairs of a moneyed corporation through its agents, I should perhaps hesitate to so hold if the definition is capable of such extension as to include the standard of conduct to be applied to directors in determining what constitutes participation in fraud.
In my opinion the Legislature has not attempted to define what acts by a director shall constitute participation in a fraud and it need not do so. The fraud is sufficiently defined. The agent who transacts the business of the moneyed corporation must exercise the care and diligence required of an agent for compensation. If he fails and insolvency follows, the insolvency is fraudulent. If a director participates in that fraud he is criminally responsible, not otherwise. The term "participates" is analogous to "aid" or "abet." (State v. Fox,70 N.J. Law, 353.) So it has been construed *Page 482 
in fixing penal or civil responsibility of corporate directors. (State v. Ross, 55 Or. 450.) "One who assists another, in any manner, in carrying out a fraudulent purpose is a `particepscriminis.' It is utterly immaterial what means he resorts to." (Alberger v. White, 117 Mo. 347.)
So construed the statute does not impose criminal responsibility upon a director merely because he has failed in care and prudence. There must be more before there is "participation" in fraud. There must be an act or omission which logically leads to the inference that a director has had a share in the wrongful acts of corporate agents which rendered its insolvency fraudulent. True, negligence itself may at times sustain an inference of fraud. (Ultramares Corp. v. Touche,255 N.Y. 170.) Then there may, perhaps, be finding of participation. At least there must be evidence from which acquiescence if not active aid may be inferred.
Even under this construction, the indictment here is sufficient. Therefore, I concur in the reversal of the judgment. Perhaps the Legislature should speak in less uncertain terms in warning directors of banks that they must be vigilant in the performance of their duties. In the absence of warning that misplaced reliance by directors in the officers of the bank may result in placing criminal responsibility upon directors, I hesitate to join in any decision which may place the brand of a criminal upon men of good intentions.