Court Opinion

ID: 5186498
Source: CourtListenerOpinion
Date Created: 2022-01-06 15:29:20.844487+00
Date Added: 2024-06-11T08:26:46.327668
License: Public Domain

McLaughlin, J.
(dissenting) :
The learned justice at Special Term, at the opening of the trial,, on motion of the defendants’ counsel, dismissed the complaint on- “ the ground that the liability of the several directors is a primary' liability, enforceable in an action at law, and that the action, as brought and as stated in the complaint, cannot'be maintained in a-court of equity.” Judgment was entered to this effect and the-plaintiff has appealed. My brethren have reached the conclusion that the question was correctly disposed of at Special Term, and that the judgment should be affirmed, but in this I cannot concur. The action is an equitable one, brought by one creditor of an insolvent corporation in behalf of himself and all other creditors similarly situated who may become parties to the action, against the directors of the corporation, to subject them to the personal liability provided by section 11 of the Membership Corporations Law,*78'This provision of the statute provides that “ The directors of every membership corporation * * * shall be jointly and severally liable for any debt of the corporation contracted while they are .directors, payable within one year or less from the date it was contracted, if an action for the collection thereof be brought against the corporation within" one year after the debt becomes due, and .an execution issued therein to the county where" its office is, or where .a certificate of its incorporation is filed, be returned wholly or partly Unsatisfied ; and if the action- against the. directors to recover the .amount unsatisfied be commenced within one year after, the return .of such execution.”
The complaint contains a statement of- the facts necessary to constitute a cause of action against the directors, except as to the recovery of a judgment against the corporation, the issue of an execution thereon and the return of the same wholly or partly unsatisfied. But, as to such omission, it is alleged that a temporary receiver was appointed of the corporation in sequestration proceedings insti-tuted by a majority of the directors, and that the order appointing-"him enjoined and restrained the plaintiff from commencing or prosecuting any action against the corporation for the recovery of his-claims, which order remained in force until the corporation was finally dissolved and a permanent receiver appointed for all its assets. Jt also contains a statement that many of the creditors have begun, .or are about to begin, actions in their own behalf against the directors severally to enforce this statutory liability, and that by reason -thereof a great multiplicity of actions will be instituted which will result in a great, loss and expense, both to the creditors as .well as to -the directors, and in a waste of the moneys due from the directors to •the said creditors. The receiver, as well as such creditors, are made parties defendant, and the latter are sought to be enjoined from commencing or prosecuting actions on their own behalf.
The liability of the directors under the statute referred to, is, in-principle, analogous to the statutory liability of stockholders for the •debts of a corporation under the Stock Corporation Law (Chap. 564, Laws of 1890, as amd. by chap. 688, Laws of 1892, § 54). That .the liability of stockholders can" be enforced in this State in an equitable action is so well settled by numerous decisions that the citation of authorities is unnecessary. Equitable jurisdiction to *79enforce the liability of stockholders is sustained, either because the liability provided for is a fund to which all the creditors have an equal right to resort (National Bank of Auburn v. Dillingham, 147 N. Y. 603; Marshall v. Sherman, 148 id. 9; Hirshfeld v. Fitzgerald, 157 id. 166), or else to prevent a multiplicity of actions. (Pfohl v. Simpson, 74 id. 137; National Park Bank v. Goddard, 131 id. 494; Cochran v. American Opera Co., 20 Abb. N. C. 114; Bagley & Sewall Co. v. Ehrlicher, 8 App. Div. 583.) Ho good reason can be assigned why equitable jurisdiction ought not to be sustained to enforce the liability of the directors in the case at bar to prevent a multiplicity of actions, as it is in actions against stockholders to enforce their liability. In Bagley & Sewall Co. v. Ehrlicher (supra) the court held that, when many creditors of an insolvent corporation have brought separate actions at law against stockholders who are severally individually liable for its debts, the Supreme Court has power, at the instance of a creditor suing on behalf of himself and all other creditors similarly situated, to secure an accounting and an adjudication as to the respective liabilities of the respective stockholders, to restrain creditors who have brought individual actions from the further prosecution of their actions, to the end that the rights of all the creditors and the liabilities of all the stockholders may be adgudged in one action. And the reason assigned by the Court of Appeals for sustaining the exercise of equitable jurisdiction in Pfohl v. Simpson (supra) is just as applicable in this case as it was in that. The court, speaking through Judge Folqeb, said : “ There is nothing in the provisions of the charter of this corporation nor in any of the decisions which have been made upon analogous acts, which is inconsistent with the exercise in this ease of the established jurisdiction of equity to forestall a multiplicity of actions, by bringing all the litigation into its own grasp in one suit for a general accounting and a complete adjustment of all rights.
“ It is in cases where many persons have claims, and are prose-outing or about to prosecute them at law against one defendant, ■or against a class of defendants, or against a fund, liable in equal ■degree to all those persons and to others, and thus there arises the fact or the probability of a multiplicity of actions, that this jurisdiction of equity attaches.
*80‘ “ It matters not whether the right of action to so many arises from general principles of law, or from particular provisions of Consti. tution or of statute. If the right exists and is likely to he used so as-to produce the mischief, the jurisdiction of equity arises and attaches. It is recognized in Weeks v. Love (50 N. Y. 568), and cases are there-cited to the effect that there may he an equitable action against all such stockholders; and that in a proper action the court may provide for the taking an account and enforcing the liability of all of them, for the benefit of all the creditors entitled to share in the fund to be collected from such stockholders. When equitable jurisdiction to-this extent is declared, then follows the other jurisdiction of equity to restrain separate and individual actions at' law in the same or other court, and to bring all proceedings into ene suit and all parties to one tribunal.” (See, also, National Park Bank v. Goddard, supra.) The avoidance of a multiplicity of actions is one of the recognized grounds of equity jurisdiction, and upon the facts stated in the complaint and under the authorities cited, equitable jurisdiction here sought to be invoked should have been sustained.
I am, also, of the opinion that the complaint was improperly dismissed, for another reason. The debt which the plaintiff is seeking to compel the directors to pay was not contracted by them, and their only liability to pay the same or any part of it originated in and depends upon the statute. This liability, strictly speaking, is not based upon contract, but is created by statute. It is not primary in any proper sense in which that term can be used, but is secondary, and its enforcement entirely depends upon the. failure of the corporation, in the first instance, to pay and discharge its own obligations. It is not a general liability, but a special qualified one, conditioned upon the failure of the primary or principal debtor itself to pay. The statute expressly provides that this liability cannot be enforced until the debtor has first procured a judgment against the corporation, issued execution thereon, and the same.has been returned wholly or partly unsatisfied. After .this has been done an action may be maintained against the directors to recover,, not the amount of the debt, but the amount of the judgment remaining wnsatisfied. The. directors are in effect made to guarantee, not the payment of all the corporate debts, but only such portions of them as may remain after the application of all the property of the *81Corporation to the payment of its debts. (Marshall v. Sherman, 148 N. Y. 20.)
The recovery of a judgment and the issue and return of an execution thereon having been made impossible without fault. of the plaintiff, he is not thereby deprived of his remedy against the directors. The law never requires an. impossibility; .but befbre the plaintiff can subject the directors to the liability created by the statute he must apply toward the' payment of the corporate debts-all of the corporate assets. This the statute clearly contemplates. A permanent receiver having been appointed, this can only be done by compelling him to account. Until such accounting be had and an application be made of the proceeds of the assets held by the receiver, it is difficult to see how a recovery can be had against the directors, because until then the extent or amount of their liability cannot be ascertained. The complaint is sufficient to enable the court to direct an accounting, even without amendment. But the amendment asked for should have been granted. Ho one could have been injured by it. The receiver is an officer of the court, whose duty it is, under the authority and power'of the court, to manage, protect and care for the corporate assets, and to account to the court whenever called upon to do so. He represents the interests of all parties alike, as the arm of the court, and whatever he does is for the benefit of all. He is a party to the action and as such interposed an answer. The complaint alleges his appointment, which is not denied. He presumptively holds assets, and whether he does or not, his appointment and qualification are in and of themselves sufficient to require him to give an account of his proceedings. The answers of the different directors all allege that he holds assets for which he has not accounted; and those answers, so far as the receiver is concerned, should have been considéred in connection with the complaint.
But it is said that the plaintiff has not asked for a judgment directing the receiver to account. He has, as we have seen, made the receiver a party, and in his complaint he has stated the facts which show that he is entitled to an accounting; and if the prayer for judgment is deficient in this respect, it is of no importance, because an answer having been interposed by the receiver, the court can permit *82the plaintiff to take any judgment consistent with the case made by the complaint and embraced within the issues. (Code Civ. Proc. §1207.) “A plaintiff is not to be turned out of court where an answer had been interposed, because he has prayed for too much or too little, or for wrong relief.” (Murtha v. Curley, 90 N. Y. 377.) All the parties interested' in the assets or property held by the receiver are before the court, and no good reason can be given why, in this actiou, his accounts should not be settled^ the assets in his hands, aftei; the payment of proper expenses, applied toward the payment of the corporate debts, and the directors held for the deficiency.
For these reasons' I am of the «opinion that the learned justice at Special Term erred in dismissing the complaint, and that the judgment appealed from should be reversed and a new trial granted, with costs to the appellant to abide the event.
Judgment affirmed, with costs...