Allison v. Coal Creek & N. R. Coal Co.

• Decision Date: 04 October 1888
• Citation: 9 S.W. 226,87 Tenn. 60
• Parties: ALLISON v. COAL CREEK & N. R. COAL CO. et al.
• Court: Tennessee Supreme Court

9 S.W. 226

87 Tenn. 60

ALLISON v. COAL CREEK & N. R. COAL CO. et al.

Supreme Court of Tennessee.

October 4, 1888

Appeal from chancery court, Knox county; HENRY R. GIBSON Chancellor.

Bill by Robert Allison and other creditors of the Coal Creek & New River Coal Company and others, to compel certain directors defendants herein, to pay certain debts of said corporation. From a decree for defendants complainants appeal.

Cooper & Frame and Lucky & Yoe, for appellants.

Webb & McClung, for appellees.

LURTON J.

This is a bill filed by creditors of the defendant corporation-- First, to have the corporation wound up as an insolvent corporation, and its assets equally distributed among all its creditors; second, to hold the directors, who are made defendants, individually liable for all debts created in excess of the capital stock paid in. The first relief sought has been obtained under the decree of the chancellor, and no error is assigned thereto. The corporation is a coal mining company, and was organized in June, 1884 under section 11 of the general incorporation act of 1875, with a capital of only $2,100, all of which was paid in. The company, at the time of its organization, by the assent of all the directors, assumed the indebtedness of a partnership which had existed between four of the five corporators. The indebtedness thus assumed exceeded the capital stock by $3,103.18. The question, as now presented upon this transcript, involves only the responsibility of defendants John Chumbly and Robert Donaldson, both of whom were directors from the time of the organization of the corporation until December 5, 1884, when they sold out their stock, and resigned from the board. At the time of their resignation, the debts, including debts due to two of the directors, Coffin and Brooks, exceeded the capital stock some $20,000. The debts now due and unpaid, including the claims of Coffin and Brooks, exceed somewhat this sum; but the larger part is due to the defendants Coffin and Brooks, and no question is before us concerning this. The unpaid debts, pressing for a decree against the directors individually, may be divided into two classes-- First, those created before the resignation of Chumbly and Donaldson; second, those created after such resignation. The first class consists entirely of debts for machinery used in the mines, and as to these the defense of both Chumbly and Donaldson is that they did not assent to their creation. The debts assumed at time of organization, and in excess of capital, have all been paid; but the complainant contends that the liability which attached to the directors individually, by their assent to the creation of an indebtedness in excess of capital stock, is not discharged by such payment; that creditors, whose debts were subsequently created, have a right to look to the liability incurred by the first breach of trust; and that the liability thus created constitutes a fund for the benefit of all creditors whose debts were in excess of capital stock.

This contention involves a construction of the clause in defendant's charter, which, in certain cases, imposes an individual liability upon the directors. This clause is as follows: "If the indebtedness of said company shall at any time exceed the capital stock paid in, the directors assenting thereto, shall be individually liable to the creditors for said excess. Acts 1875, (Mill. & V. Code, § 1858.) We think the purpose of the legislature, as manifested in this provision of the act authorizing the incorporation of mining and manufacturing companies, was to prevent the creation of debts in excess of capital stock, by declaring such management to be a breach of trust. Individual liability is assumed by all directors assenting to such breach, and in favor of all creditors who shall suffer thereby. The primary liability remains upon the corporation, and only in the event of the failure and inability of the corporation to pay dues a right of action arises in favor of the creditor whose debt was made through the breach of trust. We do not think that it was the legislative purpose to make the assenting directors individually liable to any but a creditor whose debt was made with the assent of such director in excess of capital stock. If the debt of such a creditor is subsequently paid, he has not suffered by such breach, and no subsequent creditor can enforce, in his own favor, a liability discharged by such payment. In other words, the liability of the director depends upon three conditions-- First, assent by him to the creation of the debt upon which he is sued; second, that the debt has not been paid; third, that the corporation is insolvent. Unless the very debt upon...