James Rorke et al., Respondents, v. William M. Thomas et al., Appellants

James Rorke et al., Respondents, v. William M. Thomas et al., Appellants. The object of the provision of the act of 1848 for the formation of corporations (§ 13, chap. 40, Laws of 1848), making the trustees of any corporation organized thereunder liable for its debts, in case they declare and pay a dividend when the company is insolvent, or which will render it insolvent, or will diminish the amount of its capital stock, was to prevent the dissipation of the fund designed for the benefit of creditors; and although, it being penal, a clear case must be established, yet the substance of the provision, not the mere form, must be the test of liability. Defendants were trustees of the B. F. G-. Co., a corporation organized under said act. They entered into an agreement with H., for the sale to him of all the property of the company, with the exception of debts due the company and some articles of personal property, the sale to be consummated by a transfer of the stock. The agreement was carried out, the stock transferred, and the consideration received paid over to the stockholders in proportion to the amount of stock held by each. The property reserved was afterward transferred to the secretary to be converted into money to pay debts and liabilities, the residue to be distributed among the stockholders who assented to the agreement with H. In an action under said section 13, to recover a debt of the company, it appeared that the capital of the company was impaired, and plaintiffs’ evidence tended to show that this property reserved was disposed of, and a portion of the proceeds divided among the stockholders. Held, that the legal effect of the contract with H. was a sale of the stock by the stockholders consenting, H. thereby becoming the principal stockholder, the company\still remaining in existence and retaining its property, and that this transaction therefore did not make defendants individually liable under said section; but that the subsequent transfer, sale and division of a portion of the proceeds was in substance and effect the declaring and paying a dividend which took from the assets of the company the amount so distributed, and to that extent diminished its capital, and that this transaction rendered defendants liable. (Argued April 30, 1874; decided May 26, 1874.) The trustees are not liable under said section for the costs in a judgment against the company perfected after they have ceased to be trustees. • Appeal from judgment of the General Term of the Supreme Court in the second judicial department, affirming a judgment in favor of plaintiffs, entered upon the decision of the court at Special Term. This action was brought by plaintiffs, as creditors of The Brooklyn Flint Glass Company, against defendants, who were trustees of said company, for the purpose of charging them individually with the payment of an indebtedness of the company to the plaintiffs, under section 13 of chapter 40 of the Laws of 1848, upon the ground that the defendants, while they were such trustees, did declare and pay to the stockholders of said company a dividend which diminished the amount of its capital stock. The evidence shows that an agreement was made by the trustees with one Amory Houghton, on the 6th of August, 1864, to sell him all the property and effects of every name and description belonging to the company (except debts and claims due the company); and upon the payment by Houghton of the moneys agreed to be paid by him, to convey, transfer and deliver to him, the real estate, property and effects agreed to be sold to him, by causing to be transferred to him the whole of the capital stock of the company. The agreement further provided, that if stockholders should refuse to transfer their shares, such refusal should not invalidate the agreement, unless the number of shares refused to be transferred should exceed 150; but that in such case, upon the final payment by Houghton, a ratable proportion of the price to be paid should be deducted for the shares refused to be transferred. Some of the stockholders refused to transfer their stock, and a corresponding deduction was made from the price agreed upon. On the 9th day of December, 1864, Houghton completed his payments, and all the stock of the company, except a small amount so retained,, was transferred to him. Ho other title to the property or assets of the company was given to Houghton than the transfer of this stock. The items of assets reserved in the agreement were subsequently, by a resolution of the board of trustees, transferred to defendant Fellows, then the secretary of the company, with instructions to convert the same into cash, and therewith pay the debts of the company, and to distribute the residue among the stockholders who assented to the agreement with Houghton. At the time of these transfers, the company was indebted to plaintiffs. An action was subsequently brought by the plaintiffs here, against the company thereon. This action was defended; it resulted in a judgment for plaintiffs, which was perfected April 29, 1867, which judgment was affirmed upon appeal. The property transferred to Fellows, as the evidence tended to show, was disposed of by him, and a portion of the proceeds divided among the stockholders. The original stockholders, consenting to the transfers, realized about seventy per cent of the par value of their stock. It appeared that all the assets prior to the transfer to Houghton, after payment of debts and incumbrances, were of less value than the- amount of the capital stock. Further facts appear in the opinion.. Amasa J. Parker for the appellants; The finding by the court of any material fact wholly without evidence, or against undisputed evidence, is an error of law and re viewable by this court. (Sheldon v. Sheldon, 51 N. Y., 354; Mann v. Lord, 40 id., 477; Fellows v. Northrup, 39 id., 114;) Only trustees who are guilty of a neglect of duty are liable. (Boughton v. Otis, 29 Barb., 196.) Chapter 40, Laws of 1848, is highly penal and cannot be extended by construction to cases not fairly within its language. (Garrison v. Homer, 17 N. Y., 458, 466; Miten v. White, 50 id., 137, 139; Stebbins v. Edward, 12 Gray, 303; Mer. Bank v. Bliss, 21 How. Pr., 365; 5 Wheat., 86, 95, 96, 105; Dwarris, 634, 635, 640.) The judgment recovered against the company was no evidence of the plaintiffs’ .debt as against these defendants. (Miller v. White, 50 N. Y., 130.) Michael Nolan for the respondents. [MAJORITY — Church, Ch. J.] Church, Ch. J. The Special Term found “ that while the defendants were trustees, they, as such trustees, declared and paid, out of the property of said corporation, a dividend which rendered the said company insolvent, and which diminished the amount of the capital stock thereof; ” and the only question in the case is, whether there was any-evidence to justify this finding. The contract of sale to Houghton is somewhat ambiguous, but I do not think the legal effect of it was to sell the property of the corporation, and declare and pay a dividend, within the meaning of the statute under which the action was brought. It provides for a sale of all the property of the company (with certain exceptions), by transferring all the stock, with a provision that stock, not exceeding 150 .shares, which could not be obtained, should not invalidate the contract, but that a corresponding deduction should be made from the purchase-price. Nearly all the stock was transferred, and the consideration agreed upon, after it was received, was paid over to the respective stockholders who transferred their stock, according to the amount held by each. It is true that the contract was not in form a sale of stock by each stockholder, but such was its necessary legal effect. The stockholders who consented to the arrangement transferred their stock and received the agreed price for it. Houghton thereby became the principal stockholder, and as such controlled the property; but the company remained in existence, and all the property it ever had still belonged to it and was liable for the payment of its debts. ¡Nor did the formal tr'ansfer to the new company, subsequently, deprive the creditors of this company of the right either to pursue the property in the hands of the new company or its avails in the hands of the old company. Corporations cannot, any more than individuals, relieve their property from the payment of debts, except by a sale or transfer in good faith and for a, full consideration. Upon the sale of the .stock to Houghton the stockholders received, over and above incumbí'anees, §64,000, besides the value of certain personal property to be appraised; and the consideration for that portion of the property sold to the new company was §90,000, including incumbrances. The company all the time remained perfectly solvent and abundantly able to pay all its debts. It is probable that the intention was from the beginning to wind up the affairs of the old company and merge ■ its assets with those of the new; and the sale of stock and transfers made was the mode resorted to for the purpose. This would have been unobjectionable provided the debts of the old company were all paid; but the company was not, in fact, dissolved, and did not cease to do business until after all these transfers were made. It provided for the payment of its debts ; and, I infer, actually paid them all except the claim of the plaintiffs, which was disputed and litigated; and there is no doubt but that debt could have been enforced, either against the property in the hands of the new company or the consideration received from it therefor. But there is a feature of the transaction which presents a more serious question. The assets were not all included in the sale of stock to Houghton. The debts due to the company and some personal property were reserved. This property was afterward transferred to the secretary to be converted into money to pay the debts and liabilities, and the residue to be distributed among the stockholders who assented to the agreement with Houghton. The evidence tends to show that this property realized $12,000 or $15,000; a portion of which was divided among the stockholders;' and the Special Term would have, been justified in so finding. The effect of this was to abstract from the assets of the company the amount thus distributed, and to that extent to diminish the amount of its capital. As we have seen, the property specified in the agreement with Houghton, remained afterward the property of the company, and constituted a part of its capital; and, fro tanto, that reserved and divided must also be regarded as a part of its capital. If the trustees had sold the whole property to outside parties and divided the proceeds it would have rendered them clearly liable under the statute; and I am unable to see why the same result does not follow from a sale of a part and a distribution of the proceeds. It is not an ordinary way of declaring and paying a dividend, but in substance and effect it is the same thing. The object of the statute is to prevent the dissipation of the fund designed for the security of creditors, and all who .have occasion to deal with these corporations ; and, although the statute is highly penal, and a clear case must be established, yet the substance of the act, and not the mere form, must be the test of liability. The trustees had no right as against creditors to appropriate to themselves any portion of the assets constituting the capital. The Special Term was justified in finding that they did appropriate a portion (at least) of the avails of the property reserved in the agreement with Houghton, in pursuance of the resolution of the ninth of December, and the dividend was in substance declared by that resolution. I am of opinion that the defendants, by that act, rendered themselves liable to the penalty denounced by the statute. They may have acted in good faith, believing that the claim was not a valid liability; but the prudent and lawful course for them to pursue was to have kept the fund to await the result of the litigation. By dividing it among themselves they became personally liable. The judgment is erroneous to the extent of the costs of the judgment against the company. The liability cannot be extended beyond the strict terms of the statute. This liability, as expressed, is “for all debts of the company then existing, and for all that shall be thereafter contracted while they shall respectively continue in office.” A judgment against the company was neither necessary to the liability of the defendants nor were they bound by it. (Miller v. White, 50 N. Y., 137.) It is said that they wrongfully defended the action. It was their right to do so as trustees ; and we cannot say that it was not their duty. The final recovery of judgment is not conclusive upon that question, but it is sufficient that the costs are not within the terms of the statute. Judgment must be modified by striking out costs and interest thereon, on judgment against the company, and, as modified, affirmed, without costs to either party in this court. All concur. Judgment accordingly.