Court Opinion

ID: 5462461
Source: CourtListenerOpinion
Date Created: 2022-01-09 19:40:39.951243+00
Date Added: 2024-06-11T08:32:57.163293
License: Public Domain

By the Court,

Mullin, J.
The defendant is liable to the plaintiffs in this action, provided he was a stockholder in the Saeket’s Harbor and Saratoga Bailroad Company, owning unpaid stock therein when this action was brought. .That he subscribed for stock in said company, and that he never paid for it, are undisputed facts in the case. In 1857, after the debt, for the recovery of which this action is brought, was contracted, the railroad company forfeited the defendant’s stock and all payments made thereon, to the use of the company, in conformity to the provisions of section 7 of the general railroad act of 1850. (Laws of 1850, ch. 140.) That section provides that the directors may require the subscribers to the capital stock to pay the amount by them subscribed, in such manner and in such installments as they may deem proper. If any stockholder shall neglect to pay any installment, as required by a resolution of the board, it shall be authorized to forfeit his stock ánd all previous payments thereon, after notice in the manner required by said section. The plaintiffs’ counsel makes some criticism upon the proceedings of the directors, hut I believe they are in compliance with the section under consideration. I do not understand the *454plaintiffs’ counsel, or the referee, to deny but that the defendant is released from liability to the plaintiffs, if the directors had the power to declare a forfeiture of the stock, and if such forfeiture, when made, binds the creditors of the company. But it is insisted that a forfeiture of stock binds the company only; but the creditors are, notwithstanding the forfeiture, at liberty to enforce the payment of their debts, so long as the stock is not actually paid up. The question is one of great importance, and not free from difficulty.
• The 110th section of the general railroad act, which gives the right of action against the stockholders in favor of the creditors of the company, as amended in 1854, is in these words: “ Bach stockholder of any company formed under this act shall be individually liable to the creditors of such company to an amount equal to the amount unpaid on the stock held by him, for all the debts and liabilities of such company, until the whole amount of the capital stock so held by him shall have been paid to the company.” The right thus given to the creditors is either wholly independent of the powers vested in the directors of the corporation over the stock and the holders thereof, or it is subject thereto.
. Let us examine the question upon the first hypothesis— that the right of action is 'given to the creditors of the company, wholly independent of the powers of the directors of the corporation. In the first place, the lien, if I may so term it, which the statute gives, exists in favor of a single creditor for a sum hbwever small, and is operative upon all the stockholders whose stock is unpaid, no matter hoxv large the amount of such unpaid stock may be—a burden wholly unnecessary and uncalled for. 2d. .While a creditor may be proceeding to collect his debt against a stockholder, the company is-at liberty to proceed and forfeit his stock, and when the whole amount of unpaid stock is collected, the company may have forfeited the stock, and *455thus the stock be in fact paid for, and yet the stockholder not be able to obtain a single share. 3d. The directors having no power to interfere with the creditor’s claim against the stockholders, they'cannot compromise the debt, however beneficial such an arrangement might be to the corporation or its creditors. If the directors could obtain from any embarrassed stockholder a surrender of his stock, and twenty-five or fifty per cent of the amount due upon it, in consideration of a release from liability for the residue, it would be for the advantage of all concerned to accept it. But if there is no such power in the directors, the benefit must be lost, because" the company owes a trifling debt, with ample means to pay it. If, on the. other hand, this right of the creditor is subordinate to the power of the directors, conferred by the general railroad act, to forfeit stock, and generally to manage the financial affairs of the corporation in good faith, and to thé promotion of the interests of the parties concerned, I can perceive no harm that can be done to the creditors or stockholders, while the means of the company are applied to the payment of its debts, and to carrying out the objects and purposes of its creation. The provisions of the statute under consideration can only have effect while the corporation is solvent; for when it becomes insolvent, the policy of our law has been to place' all creditors upon an equality; to take away all preference of one creditor over another, and through a receiver to collect the amount due for stock, and apply the same, with the other assets of the corporation, in payment of its debts. (3 R. S. 761, §§ 41 to 104, both inclusive, 5th ed.) But if each creditor may enforce payment by action, regardless of the rights of others, the benefit of the provisions of the Revised Statutes are lost,'and, as to this class of corporations, virtually repealed. It obviously was not the intention of the legislature to give to the creditors of a railroad corporation an absolute right of action *456against a-stockholder, which overrides all the rights of the company, because it gives the right only so long as the stock remains unpaid to the company. Thus providing that a voluntary or compulsory payment to the company destroyed all right of action in favor of the creditors. If it had been intended to give an action to the creditor, wholly regardless of the rights of the corporation, the legislature would have prohibited payment to the company, and thereby secured the preference. But it was assumed that the directors would practice good faith, and that moneys paid to it would be applied, in the regular course of business, to pay the debts of the corporation. • The right of the creditor to sue the stockholder was only given in order that the former might obtain his payment without being subjected to the delay resulting from either wilful or negligent omission of the directors to enforce the payment of the amount due for- stock. For these and other reasons that might be suggested, I am of the opinion that the right of the creditor to sue the stockholder is not independent of, but subordinate to, the right of the directors of the corporation to compromise the debt or to forfeit -the stock of the stockholder. The power to forfeit the stock in the manner prescribed is clearly given,- and, like any other power conferred on the directors, is to be exercised or not at the discretion of those to whom it is givén. The only •limitations on the powers are, 1st. That it be done in the manner prescribed; and,' 2d. In good faith.
In this case, the directors have, in the manner indicated, forfeited the defendant’s stock, and in the absence of any evidence of bad faith, we are bound to assume it to have been done bona fide. What was the effect of this forfeiture upon the'rights and liabilities of the defendant? That he lost the whole of his stock and the payments made thereon, the statute declares. Does he, nevertheless, still remain liable to creditors ? The remedies are wholly inconsistent, *457and cannot exist together. The one proceeds upon the assumption that he retains his stock, the other that he has elected to abandon it. The one perfects, if successful, the title to his stock, the other sweeps it away altogether. "When, therefore, the proceedings were complete, the forfeiture was perfect, and the defendant ceased to be a stockholder in the company. By the very terms of the act, the person sued must be, when sued, a holder of unpaid stock, and such holding and liability for debts must coexist at the same time; and the latter cannot arise except from and out of the former. After forfeiture, .there cannot be either a right to stock or liability as a stockholder. The right to forfeit the stock is perfect; it is not in terms controlled in any respect. We cannot control it by construction or implication, by reason of the provision authorizing the creditors of the corporation to sue; because that right can have all the effect intended without interfering with the authority of the directors to forfeit. The one construction gives full effect to all the provisions of the statute; prevents unjust preferences; enables corporations to transact their business in a way to secure and promote the interest of stockholders; while the other defeats all these ends, and cripples and unnecessarily embarrasses the action of the directors, and the operations of the corporation. If the creditor is not bound by the act of forfeiture, then is the forfeiture a mere sham—a cheat. It cannot be possible that the legislature intended to compel the stockholder to pay, and at the same time permit the directors to forfeit his stock. Tet both results may be attained without the creditor or company being aware of the action of the other. The answer to the position that the right of the creditor is subordinate to the right of the company to forfeit, is, that if such z’ight exists it enables the direct-oi’s to release the stockholders to the prejudice of the creditors; that every solvent stockholder may be thus *458■released, leaving the debts wholly unpaid. If the directors should intentionally discharge the stockholders, leaving the debts unpaid, it would be a fraud on the creditors, and therefore void. If it was done in good faith, having duo regard to the rights and interests of both creditors and stockholders, I can perceive no reason why it is not both • legal and proper. If we are to forbid the exercise of corporate powers, because they may be abused, we may, for a like reason, prohibit the exercise of judicial and legislative power. While every security compatible with the rights of corporations should be given to their creditors, it is not wise or just to afford them protection by the sacrifice of the rights of stockholders or of the corporations themselves.
I have already alluded to the right of a corporation to compromise with its debtors, by accepting less than the whole debt and releasing the residue. This power is not specifically given to corporations, but it results, or is necessarily implied, from the right of the company to own and dispose of property, and to manage and control it. Debts are as much a resource with which to pay, as is the unpaid stock. Both are but debts, and were it not for the right given to creditors to sue the stockholders, no one would pretend that the company could not compromise a debt due to it for stock as effectually as one for cloth or lumber. Under the authority to compromise, the creditors or stockholders may be as effectually injured as by the forfeiture of stock. Tet it will not be pretended that a compromise made in good faith is not binding as well upon creditors as stockholders.. (Emmet v. Reed, 4 Seld. 312. Hyde, receiver, v. Lynde, 4 Comst. 387.) In the latter case the defendant became insured in the Chenango Mutual Insurance Company, and gave, in accordance with the charter, his premium note for $83.20, and paid five per cent. Soon after, he sold the insured property, and by an agreement *459with the company his note was surrendered. The company afterwards became insolvent. The receiver, finding that the insured did not pay to the company his share of the losses which had accrued before the surrender of his policy, sued on the note, claiming to recover upon it its share of the losses and expenses. By the charter the company had the right to surrender the note on payment of its share of losses, &c., the policy being at an end by the sale of the property insured. It will be seen that by the settlement a share of the losses, &c., for which the defendant was unquestionably liable, was thrown upon other persons insured, or upon those whose property was destroyed, or to whom the company was indebted. Yet the Court of Appeals very properly held the settlement conclusive, being made in good faith. Bronson, J., says: “If. the settlement, though a lawful act in itself, had been made for an illegal purpose, if for example the parties had known that there were valid claims against the company, to the payment of which the defendant ought to contribute, and yet the note was given up without consideration, for the purpose of defrauding either the creditors or the members of the corporation, the person defrauded would undoubtedly have a remedy, * * * at the most, the evidence only shows that the company made a bad bargain, and that is far enough from making out such a case as would enable creditors or any one felse to set aside the transaction.” These remarks of the learned judge apply with all their force to the case at bár. The corporation acting, as I presume, in good faith, have, in conformity with the charter, forfeited the stock of the defendant. He thereby ceased to be liable to the creditors of the company, and this action cannot be maintained. If the directors fraudulently forfeited the stock, and thereby released the defendant from liability to the plaintiffs, the forfeiture is void, and the defendant liable, notwithstanding.
*460[Oswego General Term,
July 8, 1862.
MUllin, Morgan and Bacon, Justices.
The judgment should be. reversed, and a new trial had before another referee, in conformity to our practice in this district; costs to abide the event.
Hew trial granted.