BIRD against HAYDEN

BIRD against HAYDEN. New York Superior Court; General Term, November, 1863. Individual Liability of Officers of Corporation.—Jurisdiction of Foreign Statute Actions. The personal liability for debts of a corporation, imposed upon its officers who fail to perform a duty with which they are charged by the charter, is in the nature of a penalty. Hence, the -courts of this State have not jurisdiction of actions to enforce such iability, where the charter creating it was granted by another State. The personal liability of stockholders, where they are made liable, is an original liability: and an action against them is upon their contract, made by them in a qualified corporate capacity : but where the corporate capacity is not thus qualified, and the members or officers are not liable as original or principal debtors, but by reason of something imposed on them by the statute, the action must be upon the statute, to recover a debt in the nature of a forfeiture. Exceptions taken at the trial, and directed to be heard in the first instance at the general term. The defendant, Henry H. Hayden, was a director of “ The Daggett Manufacturing Company,” a corporation formed under an act of the legislature of the State of Massachusetts, entitled “'An act relating to joint stock companies.” A provision of the act requires that the officers of the corporation shall annually, in the month of January, make and file a certificate, verified by the oaths of the president and a majority-of the directors, containing a statement of stock paid in, amount invested in real and personal estate, the amount of existing debts, &c. In case of any neglect, or refusal to perform such duty, the officers of the corporation are declared by the act to be jointly a/nd severally versonally liable for thepayment of the debts of the corporation contracted after such neglect a/nd before such certificate shall be filed. The action was brought by Oliver W. Bird, to recover the amount of two promissory notes, made by the company in August, 1860. The company was formed in April, 1857. Ro such certificate as the act required, was ever filed by the company. The cause was tried on the 13th of May, 1863, before Mr. Justice Moítell and a jury. On the closing of the plaintiff’s case, the judge dismissed the complaint, on the ground that the courts of this State had no jurisdiction to try the action, the cause of action being in the nature of a penalty, prescribed by the statute of another State. The plaintiff excepted. The judge directed the exceptions to be heard in the first instance at the general term, and suspended the judgment in the mean time. John Sessions, for plaintiff. I. We have the right to say that the contract in question was made—not in Massachusetts, but in this State—that the paper was made there to be used here, as it was used. II. The decision in this case was controlled by the case of Derrickson v. Smith, which is not authority here. It must rest now upon the same grounds as the argument of counsel—the accuracy of its reasoning. In that case significant stress is laid upon the fact that there, the liability of the officer did not attach until after the debt was created, while in this case he was liable at the instant, and that liability went with the original delivery, and the person receiving the paper had the right to take it—and we may say he, in fact, did take it solely upon the,faith of that liability. In Derrickson v. Smith, it is conceded, as it must be conceded, that when the transaction partakes of the nature of an engagement, the objection to jurisdiction is invalid ; and if the original deliveree had a right to take the paper on the faith of the liability of the officer, it could only be as an engagement, and, if necessary for his protection, the officer will be estopped from denying the engagement. III. That case, when carefully examined, will be found to rest upon the strange fallacy that this liability is imposed upon the officer—not as a liability or contract, but as a punishment; not for the protection of the few with whom they deal, whether in Boston or New York, but for the protection of the people of the commonwealth of Massachusetts, the great body of whom, from the very nature of their avocations, cannot be injured; not for the protection of the creditors of the corporation, but the morals of the people of the State. The rule of law from which this fallacy has arisen was, that penalties imposed by the laws of a State for the double purpose of punishment, and of repletir ishing the public treasury, could not be prosecuted in a foreign State. The principle upon which that rule was founded is obvious—it is impossible, upon familiar principles of law, to carry that rule where the principle on which it rests—after whatever refinement of learning or efforts of ingenious sophistry —is found to be'utterly wanting. I beg to be understood as not for a moment losing sight of the fact that not only naturally but necessarily, in a general sense, must a local judicial establishment or creation, be limited in its jurisdiction, to the same territorial laws as the power that created it—but my argument is drawn from the simple fact that jurisdiction is given to such cases at all—and that when given it is because the wants, the necessities, or the conveniences of commerce require it—and. when that distinction is appreciated, the argument is complete and scarcely needs any further illustration. If it is suggested in answer to us that local laws cannot travel, we reply: (1.) Then certainly corporations cannot. (2.) But they do essentially, when they have their notes in circulation out of their own State. (3.) But the argument is fully answered by the cases sustaining actions against stockholders brought in another State, and which are cited in Derrickson v. Smith. The authorities of this State cited by the court are relied on, upon the part of the plaintiff here (See argument of Mr. O’Conor, in Molony v. Dows, 8 Abb. Pr., 316; Ex parte Van Riper, 20 Wend., 614; Corning McCullough, 1 Com., 47). IY. The courts of our State entertain jurisdiction of actions to enforce the obligations of citizens of a foreign State, made there, for the benefit of commerce, and when the State is essentially foreign, while here in a purely commercial sense, there is no foreign State, but essentially one State, one people, one commerce and one intercourse. No natural,e physical or governmental line can be drawn to obstruct the commercial intercourse of the people of New York and Boston. They are even protected and encouraged in their commercial intercourse by the same general laws and government. Then separate municipal and judicial establishments do not make them foreign nations, and are, at best, artificial and accidental. A corporation of Massachusetts’ creation, organized by citizens of New York doing business in New York, is a fiction there but a reality here; and to allow them the benefits which may attach to the fiction, divested of the responsibilities which attach to the reality, is to make Massachusetts at once a foreign nation and a public enemy, inasmuch as she furnished to our citizens both the inducement and the means to commit frauds upon each other, and crime here. V. It is believed to be fully settled that jurisdiction will be entertained by the courts of our State, arising upon a transaction in any foreign State, when the transaction is purely commercial, or relates solely to property, except when there are obvious objections as in case of real actions, and in all cases of mere contract even as to lands. YI. In cases like the present, it is peculiarly necessary that jurisdiction should be entertained. It is demanded on account of recent rapid multiplication of this class of corporations. P. G. Clark, for defendant; Cited Scovill v. Canfield, 14 Johns., 338; The Antelope, 10 Wheat., 66, 123; Story on Confl. of I., §§ 620, 621; Derrickson v. Smith, 3 Dutcher, 166; and see 5 Gray, 599. [MAJORITY — By the Court.—Monell, J.] By the Court.—Monell, J. Actions to recover penalties, or forfeitures, created by statutes of other States, being local, are not cognizable by the courts of this State. This is understood to be well settled (Scovill v. Canfield, 14 Johns., 338; United States v. Lathrop, II Id., 4; Story on Confl. of Laws, §§ 620, 621), and was conceded by counsel on the argument, It is claimed, however, that this is not such an action; but that it is an action to recover upon a contract made by the company, which, by force of the statute, the defendant has become individually liable to pay. There is nothing in the act of incorporation of this company which renders the directors or stockholders liable in the first instance for the debts of the company, as there is in the general banking and other laws of this State. There is no personal liability, if the company fails to pay, and hence there is no right of action against the stockholders for any debt contracted by the company, nor against the officers, so long as they discharge the duty imposed upon them by law. It is only upon their neglect or refusal to perform such duty, that they render themselves liable. The personal liability of stockholders, when they are made liable by the charter or act of incorporation, is from the inception of the debt. They become originally liable; and the happening of no event, is necessary to charge them. The company is invested with a qualified corporate capacity, but no immunity or exemption from personal liability for the debts of the company is conferred upon the stockholders. In those cases, in judgment of law, the debt is contracted upon the terms and security authorized by the statute, and the creditor, having exhausted his efforts to collect from the company, may resort,by a common law action, directly to the stockholder, not to recover a penalty or forfeiture, nor upon a cause of action in the nature of a forfeiture, but to recover a simple contract debt, for which he was liable at the time the debt was contracted. The action in that case is not upon the statute, and a .mere reference to it is all that is necessary to show the connection of the stockholder therewith, and the liability it creates. But where there is no qualification to the corporate capacity of the company, and where the stockholders are not answerable to the creditors of the company as original and principal debtors, but they, or the officer, became liable by reason of some act, the performance of which is imposed on them by the statute, then the action must be upon the statute, to recover a debt in the nature of a forfeiture, for a failure to perform a duty. In the one case the absence of any immunity from personal liability renders the shareholder liable when the debt is contracted ; in the other the director’s liability is created by his own act or omission to act. It seems to me very clear, therefore, that the personal liability imposed upon the officers of a corporation, who shall have neglected or refused the performance of a duty, with which they are charged by the statute, is in the natwre of a penalty, and was designed as a punishment for such neglect. Such is the plain import of the language of the statute. The directors shall file a certificate, and if they refuse or neglect, they shall forfeit to the creditors the amount of their respective debts. The object of requiring a certificate to be filed, was to enable all who thereafter dealt with the company, to ascertain its pecuniary condition; hence, the penalty goes to such creditors as may have been deprived of this source of information. A charter, or an act of incorporation, is doubtless a contract: nevertheless, penalties and forfeitures may proceed from it; and where the charter is conferred by public law, and the penalty is created by public law, it becomes, to all intents, a penal statute, and if the general manufacturing law of Massachusetts had ordained, that if the directors neglected to file a certificate they should forfeit ten thousand dollars to the use oí the creditors, the statute would not have been any more penal than in the form it now has. In either case, it must be a penalty or forfeiture, and must be sued for and recovered as such. The case of Corning v. McCullough (1 N. Y. [1 Comst.], 47) involved the consideration of this question, and received a very careful examination by the court. The ninth section of the act incorporating the Rossie Galena Company provides that the stockholders of the company should be jointly and severally personally liable, for the payment of all debts contracted by the company. The question was, whether the statute Emitation of three years in bringing an action upon a statute made for a forfeiture or penalty, given in whole or in part to any person who would prosecute for the same, applied to that case. The court, in a very elaborate opinion, delivered by the late Chief Justice Jones, held, that to come within the statute, the action must be on the statute for a forfeiture or cause, the benefit and suit whereof is limited wholly or in part to the party aggrieved, The learned judge says, “I think the intention of the legislature to have been, to apply them to forfeitures, and penalties, and causes of action of the like character, partaking of the character of penal actions.” The distinction between the original liability of stockholders, and such as attaches to officers for neglect of duty, is clearly drawn, and constantly kept in view in the case referred to; and it is held that in the former case, the stockholders being original debtors, are liable as co-partners, and are not exempted by the corporate capacity of the company; and in the latter, that their liability not being original they could only be charged by their own act. In the one case, the action was a common law action for the recovery of the debt; in the other, it was upon the statute, for the recovery of the penalty. The court say—“ The liability of this defendant to these plaintiffs is neither for a penalty inflicted 'upon Mm for any offence committed by Mm, nor for any forfeiture incurred by him, nor does it possess any element or feature of a penal character, assimilating it to either forfeiture or penalty.” Again, “ It is the policy of the statute to limit the commencement of actions _ for forfeitures and penalties to shorter periods of time than actions on contracts, and for vested rights, and legislatme enactments subjecting the aggressor to a specific measure of damages, or a specific compensation for the injuries he causes, may be in their nature penal.” Ex parte Van Riper (20 Wend., 614) is fully sustained by Corning v. McCullough. There Yan Riper, a director of the bank, was personally liable. The fourteenth section of the charter provided that the president and director should jointly and severally be and continue liable, individually to every creditor, for the payment of the debts of the bank; and the court held, that the liability was original, and not incurred by any subsequent act. This case is referred to, and approved by Mr. Justice Bbonscb, in his concurring opinion in Corning v. McCullough./ In both these cases the line is distinctly drawn between the original personal liability of the stockholder or director, created by the charter or act of incorporation, and such liabilities as attach by some subsequent act of the officers. In Garrison v. Howe (17 N. Y., 458) the defendant was sought to be charged as a trustee of a manufacturing company. The act of incorporation required the trustee to make and file an annual report, &c, and declared that for any neglect to do so the trustees should be individually liable for the debts of the company. The trustees neglected to file their report. The question of jurisdiction did not arise, but Denio, J., says, “ if the statute was simply a remedial_one, it might be said that the plaintiff’s case was within the equity: for the general object of the law doubtless was, besides enforcing the duty of making reports for the benefit of all concerned, to enable parties proposing to deal with the corporation, to see' whether they could safely do so. Bui the provision is highly penal, and the rules of law do not permit us to extend it by construction to cases not fairly within the language.” In a recent case in this court (Merchants’ Bank of Mew Haven v. Bliss, 13 Abb. Pr., 225), a question similar to that in Corning v. McCullough (supra) arose. The defendant was sued as a trustee of a manufacturing company organized under the general law of this State, which contains, substantially, the same provision respecting the duty of the trustees to make and file a report, and their personal liability for not doing so, as are contained in the Massachusetts law, and he was sought to he made liable, by reason of the trustees having failed to make their report. The inquiry was, whether the statute limitations of three years for actions upon a statute for a penalty or forfeiture, applied, and it was held that it did. The court, in elaborate opinions delivered by two justices, -decided that the action' was necessarily upon the statute to recover a penalty, or forfeiture. This question has also been very carefully examined, and fully considered by the supreme court of Mew Jersey (Derrickson v. Smith, 3 Dutch. (N. J), 166). It arose under our general manacturing law ; and the defendant was sought to be held liable in that State, the corporation being located, and the neglect of the officers having occurred in this State. The court held the action, was for a penalty, and could not be maintained in'that State. The case is well supported on principle, as well as by the authority of the cases I have above referred to. The examination I have been able to give this subject has strengthened and confirmed the views I entertained at the trial, and I see no reason now to change them. The exceptions should be overruled, and judgment directed for the defendant. Present, Boswobth, Ch. J., and White and Mohell, JJ.