Court Opinion

ID: 3605752
Source: CourtListenerOpinion
Date Created: 2016-07-05 23:51:16.303854+00
Date Added: 2024-06-11T14:07:28.156644
License: Public Domain

The defendants have been indicted for the crime of participating as directors in the fraudulent insolvency of a moneyed corporation in contravention of Penal Law, section 297, subdivision 1. There were demurrers to the indictment which the trial court allowed. The Appellate Division unanimously affirmed.
Penal Law, section 297, read as follows:
"Every director of a moneyed corporation who:
"1. In case of the fraudulent insolvency of such corporation, shall have participated in such fraud; or,
"2. Willfully does any act as such director which is expressly forbidden by law, or willfully omits to perform any duty imposed upon him as such director by law,
"Is guilty of a misdemeanor, if no other punishment is prescribed therefor by law.
"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." (cf. Penal Code, § 603; Laws of 1892, ch. 692; Penal Code, § 604; Laws of 1881, ch. 676.)
The last paragraph of this section is a re-enactment of a like provision in the Revised Statutes of 1829 (Part I, ch. XVIII, tit. II, art. 1, § 14) which added, however, another paragraph as follows: "And it shall be *Page 468 
incumbent on the directors and stockholders of every such insolvent corporation to repel, by proof, the presumption of fraud." This paragraph, repealed in 1830 (Laws of 1830, ch. 71), disappeared from the statute books of New York, and has not been re-enacted.
It disappeared from the statute books of New York, but was copied elsewhere. In particular, it reappeared in Georgia. By the Banking Act of that State, "every insolvency of a bank shall be deemed fraudulent, and the president and directors shall be severally punished by imprisonment and labor in the penitentiary for not less than one (1) year nor longer than ten (10) years; provided that the defendant * * * may repel the presumption of fraud by showing that the affairs of the bank have been fairly and legally administered, and generally, with the same care and diligence that agents receiving a commission for their services are required and bound by law to observe; and upon such showing the jury shall acquit the prisoner" (Georgia Banking Act of 1919, art. XX, § 28). The Supreme Court of the United States had before it, in Manley v. Georgia (279 U.S. 1), the case of a director convicted of fraudulent conspiracy under the provisions of that act. The court held that the presumption of fraud from the mere fact of insolvency was unreasonable and arbitrary, and that the defendant could not lawfully be charged with a duty to repel it.
Upon the authority of that decision, these demurrers were allowed.
"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" (Penal Law, § 297). This provision is more than a presumption, if indeed it is that at all. It is also a definition. It defines the standard of conduct to be attained by directors if they are to avoid the imputation *Page 469 
of sharing in a fraudulent insolvency. To the extent that it establishes a presumption in favor of the People, it is arbitrary and void (Manley v. Georgia, supra). To the extent that it establishes a definition of a fraudulent insolvency, it is valid, unless the standard of conduct is too vague to give warning to directors of the rule to be obeyed.
The statute, as we read it, is not subject to that reproach. It appeals to common-law standards of diligence and duty, standards to which business men and fiduciaries have accommodated themselves for centuries. It gives warning to directors that they must manage the affairs of a moneyed corporation fairly and legally and with the same care and diligence that is owing from paid agents, and that if they fail to do this, and by reason of such omission insolvency supervenes, they will be guilty of a misdemeanor. "Fairly," we interpret as meaning "in good faith." If that branch of the definition is to be excluded as indefinite, there still is left enough to fix the meaning and the duty. The definition will not be suffered to fail as an entirety. "Legally," we interpret as referring to the statutes of the State, and particularly the statutes regulating the management of banks. Finally, supplementing the test of good faith and illegality, there is another test more definite, one that is capable of standing by itself if both others be rejected, the test of reasonable diligence. Here the duty is prescribed with clearness and precision. The test established by the statute, the diligence that is expected of agents in receipt of compensation for their services, is a legislative recognition of a standard of diligence long known to the common law. The diligent director is the one who 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" (Hun v. Cary,82 N.Y. 65, 71; Bowerman v. Hamner, 250 U.S. 504; Briggs v.Spaulding, 141 U.S. 132, 171; *Page 470 Kavanaugh v. Commonwealth Trust Co., 223 N.Y. 103, 105). Accepting the office, he accepts its burdens and its penalties (cf. Banking Law; Cons. Laws, ch. 2, §§ 123, 124).
The act is not shorn of certainty of meaning by its reference to a standard of customary diligence. The power of the Legislature to make it a crime for banking officers to be so neglectful of their duties as to involve their banks in ruin is hardly to be doubted. The power existing, one is at a loss to imagine how the prohibited omissions could be more accurately stated, without a catalogue of particulars not susceptible of enumeration in advance of the event (cf. International HarvesterCo. v. Kentucky, 234 U.S. 216, at 223). "The law is full of instances where a man's fate depends on his estimating rightly, that is, as the jury subsequently estimates it, some matter of degree" (Nash v. United States, 229 U.S. 373, 377). "The precise course of the line may be uncertain, but no one can come near it without knowing that he does so, if he thinks, and if he does so, it is familiar to the criminal law to make him take the risk" (United States v. Wurzbach, 280 U.S. 396, 399). Much will depend on the distinction whether the standard is an old one, long recognized in law and life (International HarvesterCo. v. Kentucky, 234 U.S. 219, 223), or one novel and unfamiliar, not yet approaching certainty, at least in measurable degree, through habitude and example. On one side of the line is the standard of care or judgment exacted by the statute in supplying a working place or tools for servants (Labor Law; Cons. Laws, ch. 31, §§ 240, 436; Employers' Liability Law; Cons. Laws, ch. 74, § 2; Penal Law, §§ 1275, 1276; People ex rel. Price v.Sheffield Farms Co., 225 N.Y. 25) or in driving on a highway (Nash v. United States, supra, p. 377; People v. Angelo,246 N.Y. 451), or in the avoidance of a monopoly or of undue restraints on competition (Nash v. United States, supra; see also for additional illustrations, Miller v. Strahl,239 U.S. 426, 434; Avent v. United States, *Page 471 266 U.S. 127, 130; Hygrade Provision Co. v. Sherman, 266 U.S. 497,503; Omaechevarria v. Idaho, 246 U.S. 343, 348). In these and like instances "a great body of precedents on the civil side coupled with familiar practice make it comparatively easy for common sense to keep to what is safe" (International HarvesterCo. v. Kentucky, supra). On the other side is a statute imposing a penalty on any person who makes "any unjust or unreasonable rate or charge in handling or dealing in or with any necessaries" (United States v. Cohen Grocery Co.,255 U.S. 81), where neither accepted norms of conduct nor common-law traditions of customary diligence give definiteness and significance to the acts to be avoided (Connally v. GeneralConstruction Co., 269 U.S. 385; Cline v. Frink Dairy Co.,274 U.S. 445, 459). Not even a civil liability can rest upon a prohibition so vague. and indeterminate (Standard C.  M. Corp.
v. Waugh C. Corp., 231 N.Y. 51; Small Co. v. American SugarRef. Co., 267 U.S. 233, 239). There is little analogy between this incoherence and the standard of behavior appropriate to the prudent and diligent fiduciary, bestowing upon the affairs of others care similar to that bestowed upon his own, a standard sanctioned and defined by centuries of precept and example.
Manley v. Georgia (supra) is not a ruling to the contrary. The decision in that case was not rendered on demurrer. There had been a judgment of conviction after a trial at which the statutory presumption had been applied in all its rigor. What was said in the opinion must be read in the light of the question to be answered. Not even by way of dictum, however, was there an intimation of a belief that the statute was too vague in its definition of care and diligence. At most the intimation was that there was too much of uncertainty in the tests of good faith and illegality. No discrimination had been made in the conduct of the trial between one standard and another. In the statute now before us, the test of care and diligence would stand though those of good faith and illegality *Page 472 
were rejected as indefinite. To what extent a severance of good from bad is permissible with a view to the preservation of a statute is a question of construction as to which the courts of the State, and not the Federal courts, must speak with ultimate authority (People ex rel. Alpha P.C. Co. v. Knapp, 230 N.Y. 48,60; Meyer v. Wells, Fargo  Co., 223 U.S. 298, 302;Berea College v. Kentucky, 211 U.S. 45, 55; Loeb v.Columbia Township Trustees, 179 U.S. 472, 490; Huntington v.Worthen, 120 U.S. 97).
We have said that the definition of fraud implicit in the statute may be severed from any presumption whereby fraud must be repelled. Whether there was in truth a purpose to establish such a presumption is at least not free from doubt. Section 297 of the Penal Law is descended from section 604 of the Penal Code, enacted in 1881 (ch. 676), which in turn derives from the Revised Statutes. One finds it hard to understand why the Legislature in re-enacting the Revised Statutes left out the old provision creating a presumption in terms too clear for misconstruction, if the purpose still was that the presumption should survive. Also one finds it hard to understand why, if such was the purpose, a provision should have been added that the defendant must be proved to have participated in the fraud. Much may be said in support of the contention that what was re-enacted in the new statute was meant to be a definition and no more.* Where two meanings are reasonable, the preference is given to the one that sustains a statute rather than to the one that overturns it. If, however, this principle be disregarded, and the statute interpreted as continuing the old presumption, the result will not be changed. The act will then be read as if its provisions were as follows: "The insolvency of a moneyed corporation is fraudulent unless its affairs have been administered by its directors *Page 473 
fairly, legally and with the same care and diligence that agents receiving a compensation for their services are bound, by law, to observe (cf. Banking Law, secs. 123, 124), and the burden of proof shall be on a director, when insolvency is proved, to show that it was not fraudulent, or that he did not participate in the fraud."
Plainly the presumption under a statute so framed is susceptible of severance from the accompanying definition. We think it is equally severable under the statute as enacted. Something more is here than "a mere speculation" (Meyer v.Wells, Fargo  Co., supra) whether the Legislature would have been willing to adopt the statute as remodeled. The failure to re-enact the original presumption in all its former length and breadth is in itself a token of the likely choice. It is persuasive evidence that whatever presumption may have been left surviving as the result of bungling phraseology was not thought of by the lawmakers as constituting the essence of the plan. We shall be laying "a doctrinaire emphasis on the possible rather than the probable" (People ex rel. Alpha P.C. Co. v. Knapp,supra, p. 62) if we make a contrary assumption the basis of our ruling. The whole tendency during recent years, at least in this court, has been to apply the principle of severance with increasing liberality. "Severance," we have said (People ex rel.Alpha P.C. Co. v. Knapp, supra, p. 60), "does not depend upon the separation of the good from the bad by paragraphs or sentences in the text of the enactment (Loeb v. ColumbiaTownship Trustees, supra). The principle of division is not a principle of form. It is a principle of function." "Our duty is to save unless in saving we pervert" (Ibid, p. 63).
The argument is made, however, that the definition itself, though it be severable from the presumption, must be severed once again into elements legal and illegal, and that this secondary severance exceeds the limits of our power. The suggested limitation to our thinking is *Page 474 
without sufficient basis in reason or authority. For a secondary severance as for a primary one, the test remains the same. "The question is in every case whether the Legislature, if partial invalidity had been foreseen, would have wished the statute to be enforced with the invalid part exscinded, or rejected altogether" (People ex rel. Alpha P.C. Co. v. Knapp, supra, p. 60). The Legislature has said that insolvency shall be classified as fraudulent unless there shall be good faith and obedience to the law and reasonable diligence. The prosecution is not required to prove the absence of all these elements. If that were the requirement, a different conclusion would be necessary. The prosecution prevails (according to the letter of the statute) if it proves the absence of any one of them. This being the definition, the only consequence of eliminating the element of good faith or even the element of compliance with the law is not to increase the defendant's burden but rather to reduce it. By the statute as enacted a threefold standard is prescribed. By the statute as divided the Legislature is deemed to say that if one or more of the standards be rejected as indefinite, the proof shall be confined to the one that satisfies the test of certainty. We are to figure the situation as it will exist at the conclusion of the trial. Let us assume that the People shall succeed in proving that the insolvency is the consequence of a failure on the part of the defendants to direct the affairs of the bank with reasonable diligence. Is it conceivable that the Legislature would have wished such a prosecution to fail because the jury must be told that if due diligence has been exercised, guilt may not be found for transgression of a vague command to run the business "fairly?" The question carries its own answer.
There is no occasion to consider whether certainty would be lacking if the Legislature had done something which it did not try to do, had prohibited participation in a "fraudulent insolvency" without definition of the *Page 475 
term. Enough for present purposes that nothing of the kind was done.
We think the statute is not invalid. That objection failing, we think the negligent and illegal acts and omissions enumerated in the indictment are sufficiently stated to have been factors leading to insolvency and ruin.
Proof there must be of a causal connection between the wrong and the collapse before negligence will charge with a penal liability.
In brief, the insolvency of a moneyed corporation resulting from the failure to administer its affairs with reasonable care and diligence is a fraudulent insolvency within the definition of the statute, and a director participates in the fraud when he participates in the negligence with ruin as the consequence (cf. Banking Law, §§ 123-130).
Other limitations may be found to be essential in connection with a trial. We are not required to go farther to dispose of the demurrers.
The order of the Appellate Division and that of the trial court should be reversed and the demurrers overruled.
* Cf. section 659 of the Field Draft Penal Code (1865), which recommends the adoption of section 14 of the Revised Statutes omitting the presumption.