Louisville & N.R. Co. v. Nield

• Decision Date: 31 October 1919
• Citation: 216 S.W. 62,186 Ky. 17
• Parties: LOUISVILLE & N. R. CO. v. NIELD.
• Court: Kentucky Court of Appeals

216 S.W. 62

186 Ky. 17

LOUISVILLE & N. R. CO. v. NIELD.

Court of Appeals of Kentucky.

October 31, 1919

Rehearing Denied Dec. 19, 1919.

Appeal from Circuit Court, Jefferson County, Chancery Branch, First Division.

Action by the Louisville & Nashville Railroad Company against Charles S. Nield. Judgment of dismissal, and plaintiff appeals. Reversed, with directions.

J. J Donohue, B. D. Warfield, and Moorman & Woodward, all of Louisville, for appellant.

Hugh B Fleece and Trabue, Doolan & Crawford, all of Louisville, for appellee.

CLARKE J.

The question upon this appeal is whether, in any event, a suit may be maintained in equity against a stockholder for a debt of the corporation before a judgment has been obtained at law against the corporation and a return of "no property," and without the corporation being made a party defendant. That ordinarily and as a general rule the secondary and equitable liability of a stockholder for the corporation debt cannot be enforced until the primary and the legal liability of the corporation has been determined and legal remedies exhausted by obtaining a judgment and a return of "no property" thereon is freely admitted by appellant, which insists, however, that the facts pleaded in its petition bring this case within an exception to the general rule. These alleged facts are that the defendant (now appellee) was an officer and director of the corporation, and acted for it, as its agent, in contracting the debt sued on amounting to $11,482.57; that thereafter he acquired all of the capital stock of the corporation, sold all all of its assets, and after paying all corporate debts except this one, and with knowledge of its existence, fraudulently converted to his own use the balance of the proceeds of the sale of all corporate assets, amounting to more than $40,000; that the corporation is, and has been for more than four years, insolvent and without officials or agent or business or existence in fact, though not legally dissolved.

The appellee, to sustain the action of the chancellor in sustaining special demurrers to the petition and dismissing the action without prejudice, relies upon the case of Swan Land & Cattle Co. v. Frank, 148 U.S. 603, 13 S.Ct. 691, 37 L.Ed. 577, and the general rule as stated in 10 Cyc. 728, and as recognized by this court in C. & O. R. Co. v. Griest, 85 Ky. 619, 4 S.W. 323, 9 Ky. Law Rep. 177, L. & N. R. Co. v. Biddell, 112 Ky. 494, 66 S.W. 34, 23 Ky. Law Rep. 1702, Harbison-Walker Co. v. McFarland, 156 Ky. 44, 160 S.W. 798, and Camden, Interstate Railroad Co. v. Lee, 84 S.W. 332, 27 Ky. Law Rep. 75, but it is conceded that the facts relied upon here as constituting an exception to the general rule were not present in any of the cited Kentucky cases, and that the precise question involved here is one of first impression in this jurisdiction. We need not therefore review these Kentucky cases as expressions found therein, if any that might be construed as favorable to one side or the other of this controversy were beside the question then before the court and cannot be accepted as authority.

The general rule, as stated in 10 Cyc. 728, is, in substance, that as a rule of equity procedure a creditor of a corporation cannot have equitable relief against its shareholders until he has prosecuted his demand to a judgment at law against the corporation, unless circumstances existed excusing him from doing so. On the next page (729) of the same volume it is stated upon authorities cited that there are two theories as to what will excuse the necessity of exhausting legal remedies against the corporation before a suit can be maintained upon the equitable liability of the stockholder, the first of which is that a de facto dissolution of a corporation is sufficient, while the other is that nothing less than a de jure dissolution will suffice, and in support of this latter theory we find the case of Swan Land & Cattle Co. v. Frank, supra, cited; and it is upon this case almost exclusively, stated by the chancellor in his written opinion to be upon all fours with the case at bar, that reliance is had to sustain the judgment dismissing the petition herein. As the question before us is one of practice merely, we do not feel bound to accept as binding authority the majority opinion in the Swan Case, which is declaratory only of the practice in federal courts, where the differences between equity and common-law procedure are more rigidly observed than in this state, where the practice has been liberalized in many respects by the enactment of a code of practice as well as by judicial sanction. Moreover, there are some distinguishing features in the facts of the two cases, especially one affecting the right of the sued stockholder to contribution from other stockholders, but even aside from such distinguishing features the dissenting opinion rendered by Mr. Justice Brown seems to us not only more convincing in its reasoning, but much more consonant with substantial justice and with the provisions and spirit of our Code. Outside of the federal courts the courts of last resort in Massachusetts and Tennessee seem to have taken the position that only a de jure dissolution of a corporation will excuse the creditor in failing to prosecute his demand to judgment at law against the corporation before proceeding to charge the shareholders (Boston Glass Manufactory v. Langdon, 24 Pick. [ Mass.] 49, 35 Am.Dec. 292; Blake v. Hinkle, 10 Yerg. [ Tenn.] 218), while the courts of New York and Ohio have held that a de facto dissolution of a corporation has the same effect (Shellington v. Howland, 53 N.Y. 371; Barrick v. Gifford, 47 Ohio St. 180, 24 N.E. 259, 21 Am.St.Rep. 798; Morgan v. Lewis, 46 Ohio St. 1, 17 N.E. 558). All of the authorities, however, hold that the stockholders may be proceeded against directly and without a prior judgment against the corporation after it has been legally dissolved, and this upon the theory that justice ought not to be defeated because of a failure to do an impossible thing; that is, to recover a judgment against or bring in as a party a corporation which at the time has no legal existence.

The other theory is that justice ought not to be defeated or delayed because of the failure of the plaintiff to do an impractical and vain thing, and this distinction is at best a very narrow and technical one, without real substance, and when...