Hawthorne v. Calef

• Decision Date: 01 December 1864
• Parties: HAWTHORNE v. CALEF
• Court: U.S. Supreme Court

69 U.S. 10

17 L.Ed. 776

2 Wall. 10

HAWTHORNE v. CALEF.

December Term, 1864

THE Constitution of the United States ordains that 'no State shall pass any law impairing the obligation of contracts.' With this provision in force, the State of Maine, on the 1st April, 1836, incorporated a railroad company; the charter providing that 'the shares of the individual stockholders should be liable for the debts of the corporation.' 'And in case of deficiency of attachable corporate property or estate,' the provision went on to say, 'the individual property, rights, and credits of any stockholder shall be liable to the amount of his stock, for all debts of the corporation contracted prior to the transfer thereof, for the term of six months after judgment recovered against said corporation; and the same may be taken in execution on said judgment, in the same manner as if said judgment and execution were against him individually; OR, said creditor, after said judgment, may have his action on the case against said individual stockholder; but in no case shall the property, rights, and credits of said stockholder be taken in execution, or attached as aforesaid, beyond the amount of his said stock.' Another section provides, that if sufficient corporate property to satisfy the execution could not be found, the officer having the execution should certify the deficiency on the execution, and give notice thereof to the stockholder whose property he was about to take; and if such stockholder should show to the creditor or officer sufficient attachable corporate property to satisfy the debt, 'his individual property, rights, and credits shall thereupon be exempt from attachment and execution.'

The plaintiff, Hawthorne, who had supplied the corporation then embarrassed and insolvent, with materials to build its road, having obtained judgment as a creditor against it, and being unable to get from it satisfaction (the company having, in fact, no property), sued the defendant, Calef, who was a stockholder, both at the time when the debt was contracted and when judgment for it was rendered; and no transfer of whose stock had been made. A few months after the debt was contracted, the legislature of Maine passed a statute repealing the 'individual liability' clause of the charter.

On a question before the Supreme Court of Maine,—the highest court of law in that State,—whether such repeal was or was not repugnant to the clause, above cited, of the Constitution, that court held that it was not; that the original provision,—not making the stockholder personally liable in any way,—did not constitute a 'contract' between the creditor and him, within the meaning of the Constitution; and that, while, but for the repealing act, the plaintiff would have been entitled to recover of the stockholder individually to the extent of his stock, this repealing act had taken away and destroyed such right.

Judgment being given accordingly, by the said court, in favor of the State statute, the correctness of such judgment was now, on error, before this court.

Mr. Curtis, for the creditor, Hawthorne: A charter is a contract between the State and the corporation; but not necessarily between them only. If it contain provisions on which third persons are invited to give credit, and which hold out assurances to them that if they will give credit a certain fund, or certain persons, will become responsible, such assurances, when accepted and acted on, become a contract, the obligation of which is protected by the Constitution. Thus in Woodruff v. Trapnal,¹ a charter contained the assurance that the bills of a bank would be accepted in payment of public dues. This was held to create a contract with all persons who should receive the bills while the assurance remained unrepealed. So in Curran v. The State of Arkansas,² the charter of a bank contained an assurance that a certain fund should be responsible for the debts of the bank, and this was held to amount to a contract with creditors not to divert that fund from the payment of their debts. It has been held by the courts of New York, that such an act of incorporation as this is leaves the stockholders to stand as original contractors, and liable, as such original contractors, for the debts of the corporation; and the fact that the legislature has required the remedy against the corporation to be exhausted before proceeding against the stockholder does not vary the nature or ground of his liability. In Corning v. McCullough,³ the court say:

'The original stockholders, by their acceptance of the charter, and subsequent purchasers in becoming members, assented and agreed to the terms and conditions of the act of incorporation. The defendant in this suit, in common with the other stockholders, by his acceptance of the charter, agreed to its terms, and especially to that feature of it so strongly marked, of the individual liability of the stockholders, equally with that of the corporate body, for the debts of the company. It is a liability which every stockholder must be understood to assume and take upon himself, and to be under to those who deal with the company. Dealers contract with the corporation on the faith of that security for the performance of the contract. The credit they give is given, and they trust as well to the personal liability of the stockholders, as to the responsibility of the corporation, for the fulfilment of the engagement; and each stockholder incurs that liability to the creditor the moment the contract of such creditor with the company is consummated.'

In Conant v. Van Schaick,⁴ the question now under consideration arose; and it was held that a law repealing the liability of stockholders was inoperative as to existing creditors, because it would impair the obligation of their contracts.

Even if it should be held that no contract existed with the plaintiff, save his contract with the corporation; still, the law in question did impair the obligation of that contract. When the debts were contracted the plaintiff had two remedies: one against the corporation, the other against the stockholders. The former was, and was known to be, wholly useless; the latter was sufficient and effectual; and the law in question has destroyed this sole efficient and effectual remedy, and substituted no other in its place. Such a law impairs the obligation of the contract, to enforce which the remedy was given. The principle which is decisive of this case, was laid down in Green v. Biddle.⁵ That principle is, that a law, which so changes the nature and extent of existing remedies as materially to impair the rights of the creditor, impairs the obligation of his contract.

In Bronson v. Kinzie,⁶ the State law restrained the creditor from cutting off the right of redemption of mortgaged property, by a sale under a power contained in the mortgage; and gave twelve months, after such sale, to redeem the property. It did not affect the plaintiff's right of action against the debtor to recover the debt. It did not release the property held as collateral security for the debt; but it encumbered the remedy of the creditor upon his collateral security, so as materially to impair it. For this reason the law was held invalid.

In the case at bar, while the law in question does not affect the plaintiff's right of action against an insolvent corporation which contracted the debt, it deprives him of all recourse to his remedy on the property of the stockholders, which the charter had made liable for the debt. The difference between the two cases is, that, in the case decided, the collateral remedy for the debt was only materially impaired; in the case at bar it is destroyed.

In McCracken v. Hayward,⁷ it was decided that a law prohibiting property from being sold on execution for less than two-thirds of its appraised value, so impaired the remedy as to be invalid, upon the ground that, when the contract was made, the creditor had the absolute right to levy his execution and sell the property of the debtor. Now in the case at bar, the charter of the corporation and the law of the State had conferred on the creditor the right to levy his execution on the property of the stockholders, or to subject their property to the payment of the debt by an action on the case. These laws of the State had, in the language of the court, created this right, and attached it to the contract; it was part of its obligation. As was said by the court, in Curran v. The State of Arkansas, 'The obligation of a contract, in the sense in which these words are used in the Constitution, is that duty of performing it which is recognized and enforced by the laws. And if the law is so changed, that the means of legally enforcing this duty are materially impaired, the obligation of the contract no longer remains the same.'

Mr. Shepley, contra, for the stockholder, Calef: There was no privity of contract between the creditors of the corporation and the individual members. They are, therefore, not personally liable, unless this liability is expressly imposed by statute. 'Such liability,' says Shaw, C. J., in Gray v. Coffin,⁸ 'is a wide departure from the established rules of law, and is, therefore, to be construed strictly, and is not to be extended beyond the limits to which it is carried by positive provisions of the statute.'

Then the provisions relied on to give this personal responsibility recognize the corporation as an entity, capable of contracting debts; and these are its debts, and not the debts of any other party. No other person is made liable for them; nor is even any other thing made liable for them, originally, or absolutely, or wholly, or permanently. 'The shares of individual stockholders shall be liable for the debts of the corporation.' And only in case of deficiency of attachable corporate property, the individual property, rights, and credits of any stockholder shall be liable, to the amount of his stock. This property might be...