Boughton v. Otis and others

Boughton v. Otis and others. Trustees of Manufacturing Companies. A neglect to publish the annual report required by the statute (1848, c. 40, § 12), renders the trustees then in office liable for all debts of the corporation existing whilst they are in default. A newly-elected trustee "'does not become individually liable for debts previously contracted, until after a subsequent neglect to make or publish the annual report. Houghton v. Otis, 29 Barb. 196, affirmed. Appeal from the general term of the Supreme Court, in the seventh district, where judgment was entered in favor of the defendant Otis, upon a demurrer to the complaint. (Reported below, 29 Barb. 196.) This was an action against the trustees of the Rochester Novelty Works, a manufacturing company organized under the act of 1848, c. 40, to enforce their personal liability for the debts of the corporation, in consequence of a neglect to make and publish the annual report required by law. The complaint stated that Boody, Ritter and Hunting-don were trustees of the company from the 1st of January to some time in March 1857; and that from and after that period, Boody, Otis and "x"Palmer were the 1 trustees, and continued to be so, until September 1-857. That the trustees did not, within twenty days from the first of January 1857, nor at any time since, file and publish the annual statement required by § 12 of the statute. That the corporation was indebted to the plaintiff for goods sold between the 18th January 1856 and the 5th May 1857, for which he held its promissory note; by reason of which he claimed that both sets of trustees were individually liable. The suit was commenced in December 1857. The defendant Otis demurred to the complaint; and the general term having affirmed a judgment in his favor, the plaintiff took this appeal. Humphrey, for the appellant. Cogswell, for the respondent. [MAJORITY — Comstock, C. J. Denio, J.] Comstock, C. J. The general act under which “ The Rochester Novelty Works” was incorporated, declares that the companies organized according to its provisions, shall, annually, within twenty days from the 1st day of January, make a report stating the amount of the capital stock, the proportion actually paid in, and the amount of existing debts; and that if any company shall fail to dp so, “ all the trustees of the company shall be jointly and severally liable for all the debts of the company then existing, and for all that shall be contracted before such report shall be made.” (Laws of 1848, p. 57, § 12.) There is certainly some obscurity in this language, when we come to apply it to different conditions of fact. ' “ All the trustees” are declared to be liable for “ all debts.” The most literal interpretation will undoubtedly give to the provision a broader significance than the legislature intended; for example, aboard of trustees might be superseded by a new election, immediately after a default, in making the report, had occurred; of course, *the retiring trustees would be liable for the debts then existing; they ought to be so liable, because it would be simply attaching to their own default the consequences which the statute has-declared. But, in a literal use of the language, they, would also be liable for all future debts of the company, if their successors should also fail to make the -report, although they had ceased to be trustees, or even stockholders. Thus, notwithstanding the loss of all control in the management of the company and even of all interest in its affairs, they might remain liable for ever, in consequence of the continuing default of those who succeeded them, a default which they would have no poAver to prevent, any more than they would to prevent the contracting of future debts. This clearly Avas not the intention of the legislature. o Equally opposed, in my judgment, to the equity and good sense of the statute, is a construction which imposes upon a succeeding board of trustees a liability for debts Avhich have become charged upon their predecessors by reason of the default of the latter. According to this construction, onó body of trustees may retire from office charged with all the debts of the company, because they had not complied Avith the law, while those who are appointed to succeed in the management cannot assume the trust, without taking also the personal burdens which the former trustees had incurred by their oavu neglect. This Avill appear the more unreasonable, Avhen we consider, that the trustees thus coming into office, after a default of those avIio preceded them, had no power to prevent that default, and that they have none to avert its consequences. They could not prevent it, because they Avere not in the management when it occurred; they cannot avert its consequences, if this - be the true construction of the laAv, because, although they may, Avith the utmost promptitude, file a report as the statute requires, that proceeding on their part will not discharge any personal liability, either of themselves or their predecessors, which has already accrued. The liability, when it has once attachéd, and upon whomsoever it has attached, remains fixed and unalterable; this is plain. *Such an interpretation of the statute would be a most unfortunate one for these corporations; for, I apprehend, the stockholders would find great difficulty in electing prudent and careful trustees, in the place of a reckless and improvident board, if the persons elected, at thfe momént of taking office, must become personally involved in all the embarrassments and debts of the company. A sounder and juster view of the question, it seems to me, is, that a board of trustees guilty of the default in January, and retiring from office, is liable for all antecedent debts, and for those only; and that the successors, if they continue the default, until the next January, and no longer, are liable for the debts after-wards contracted, during that year, and for no other. If the persons succeeding to office promptly obey the requirement of the act, they will escape all liability, and it is plainly just, that they should, because there is no failure of duty on their part. If they do not, they very properly incur the hazard of the debts which they themselves as trustees contract. This hazard they may be quite willing to incur; but there is neither-principle nor policy, in making them responsible for the acts and defaults of their predecessors. The general policy of the act is immunity for personal liability, but this is attended by certain conditions demanding the personal observance of the trustees. A single case may occur, where successive boards may be liable for the same debts; and that is, where there are successive defaults in January. By the express terms of the statute, the trustees omitting to file their statement, within the first twenty days of that month, are liable for all debts then existing. Now, the debts then existing may be wholly or partly the very debts for which their predecessors became liable, by reason of a default- in the January of the previous year. But from this liability there is a chance of escape, by a simple performance of the duty required, whereas, if such liability is assumed by a new board, by the very act of taking office, there is no chance of escape, except by refusing- to serve. T construe the statute according to these viervs, and it is a construction which is fatal to the plaintiff's case. The corporation *had a board of three trustees, who Avere in office on the 1st of January 1857, and they neglected, in that month and afterxvards, to make a report as required by the act. Two of them rvent out in March 1857, and Avere succeeded by txxm others; the defendant Otis is one of the latter, and he has demurred to the complaint. This suit Aims brought before the close of that year, to recover an indebtedness represented in two notes. One of the notes is averred to have been given on the 8th of April 1857, for goods sold by the plaintiff to the company, prior to the 1st of January preceding, and the other was given in July, for goods alleged to have been sold betxA'een the 8th of January and the 5th of May 1857. These averments fail to show that any part of the debt accrued prior to the time, in March, xxdien the change of trustees took place; consistently A\dth the allegation, the portion represented in the the note'last given might all hax*o accrued in the month of January. The trustees chosen in March, therefore, xx7ere not liable to pay for any portion of the goods, according to the view Aldrich has been taken of the statute. If the creditor had waited until January 1858, and no report had then been made, the case might have been different. It is scarcely necessary, perhaps, to observe, that the giving of the notes by the company does not change the result. If the new trustees, on coming into office, were not personally liable for the previous debt of the company, they plainly did not become so, because notes were afterwards given for the same debt. We think, the demurrer of Otis was well taken, and that the judgment should be affirmed. Denio, J. There is an implication in the section of the statute, under which it is sought to charge the defendant, that the report which ought to be made within the first twenty days of January in each year, may be made after-wards, so as to prevent further liability from attaching. This is but just, if we ^consider- that the trustees in office during these twenty days are the only ones whom the statute considers delinquents. If they neglect this duty during the twenty days, they are chargeable with all the prior debts, and all those contracted during these days; but their hands are not so tied up, but that they may stop the incurring of further liability, by filing the report after the time when it ought to have been done. This does not, however, prove that trustees coming into office after the twenty days have elapsed, and who were not at all to be blamed for not having filed the report within the twenty days, become, by the mere act of accepting the office, liable for all the prior debts of the corporation, and all which may be contracted before they have time to prepare the report. Such a construction would effectually deter any one from tnking that situation, in a company which had become embarrassed, and whose trustees had failed to perform this duty at the proper time; and yet, it might be quite desirable that such a company should have proper trustees to retrieve its affairs. “I think, those whose duty it is to make the report within the twenty days, and who have failed to perform that duty, are the ones whom the statute considers the delinquents, and who are permitted to avail themselves of the locus jooenitentice, so far as future liability is concerned. The sentence of the statute, that all the trustees shall be liable, is subject to some limitation; for it cannot possibly extend to those against whom no neglect is imputable, as, for instance, those who, in this case, were in office only up to the end of December. In affixing the limitation, care should be taken that an effect be not given to the provision which would work manifest injustice. Trustees coming in, say, on the first of March, as the defendant did, would necessarily be ignorant of the state of affairs of the company, and could not make a report, without proper examination; but they would, at the first moment after taking the office, be liable, upon the plaintiff's construction, for all prior debts, and this would be palpably wrong. Then, if they would not be liable for prior debts, they would not for those subsequently contracted, unless they should remain in office until the next annual period of making the report; for it is *those who are liable for the debts then existing who are made liable for those subsequently contracted. I am of" opinion, therefore, that the judgment appealed from,, which exonerates the defendant, is right, and that it-should be affirmed. Judge Davies concurred in this last opinion. Judgment affirmed. A trustee who, after a default, retires from office, continues liable for an existing debt, and for an accruing liability, so long as he continues to act as trustee. Vincent v. Sands, 1 J. & Sp. 511. Reed v. Keese, 5 Ibid. 269. But if a trustee resign, he ‘ does not become individually liable, bv reason of the subsequent neglect of his co-trustees to file the annual report. Squires v. Brown, 22 How. Pr. 35. A trustee, however, continues responsible, notwithstanding the expiration of his term, where no successor lias-been elected, and he has continued to act. Deming v. Puleston, 55 N. Y. 655 , s. c. 1 J. & Sp. 231; 3 Ibid. 309. To render a stockholder, who has been elected trustee, individually liable, there must be proof of his acceptance of the office. Cameron v. Seaman, 69 N. Y. 396. In Chandler v. Hoag, 2 Hun 613, it was ruled, that a person becoming trustee, after twenty days from the first of January, is hound to publish an annual report; and this was affirmed by the court of appeals, in 63 N. Y. 624.