National New Haven Bank v. Northwestern Guaranty Loan Company

• Decision Date: 20 June 1895
• Docket Number: 8762,9152 -- (60,59)
• Parties: NATIONAL NEW HAVEN BANK v. NORTHWESTERN GUARANTY LOAN COMPANY and Others. FIRST NATIONAL BANK OF MERRILL v. S. H. HARPER and Others
• Court: Minnesota Supreme Court

63 N.W. 1079

61 Minn. 375

NATIONAL NEW HAVEN BANK v. NORTHWESTERN GUARANTY LOAN COMPANY and Others. FIRST NATIONAL BANK OF MERRILL v. S. H. HARPER and Others

Nos. 8762, 9152 -- (60, 59)

Supreme Court of Minnesota

June 20, 1895

Two actions in the district court for Hennepin county.

The defendants in the first-named action were Northwestern Guaranty Loan Company, William S. Streeter, C. H. Pettit Loren Fletcher, W. D. Washburn, Thomas Lowry, George A Pillsbury, Charles Robinson, William H. Eustis, and Louis F Menage. In the other action the defendants were S. H. Harper W. G. Crocker, Frank J. Percival, and all the defendants in the former action.

In each of the actions certain defendants demurred to the complaint and from an order of the district court, Russell and Jamison, JJ., sustaining the demurrers, the plaintiff in each action appealed. Reversed.

These cases were argued at the October, 1894, general term. Of its own motion the court ordered a reargument at the April, 1895, general term, that it might be advised as to the construction of G. S. 1894, § 2600, subd. 3, and suggested that among the questions which had occurred to it as bearing on the construction were the following:

(1) Should it be construed in connection with G. S. 1894, § 5895, subd. 2, as being in pari materia?

(2) Do the breaches of official duty specified in G. S. 1894, § 2600, subd. 3, refer to breaches of duty towards the corporation or to breaches of duty specially affecting the creditor; or otherwise stated, does this subdivision make the offending officer liable to all the creditors of the corporation or only to those who are specially damaged by his breach of official duty?

(3) If the offending officer is liable for the corporate debts under G. S. 1894, § 2600, subd. 3, is he also liable under G. S. 1894, § 5895, subd. 2, for the loss caused to the corporation, or is the second liability included in the first; or is he liable only for one, at the election of the creditors, and not for both?

(4) Does the word "unfaithfulness" in G. S. 1894, § 2600, subd. 3, include negligence, or does it refer only to acts of positive bad faith?

This disposes of all the questions before us, and the order appealed from in each case is reversed.

John B. Atwater, M. H. Boutelle, and Ambrose Tighe, for appellant National New Haven Bank.

The complaint shows a liability under G. S. 1894, § 2600, subds. 2, 3; Dodge v. Minnesota Roofing Co., 16 Minn. 327 (368); Johnson v. Fischer, 30 Minn. 173, 14 N.W. 799; Merchants' Nat. Bank v. Bailey Mnfg. Co., 34 Minn. 323, 25 N.W. 639; Patterson v. Stewart, 41 Minn. 84, 42 N.W. 926; Nolan v. Hazen, 44 Minn. 478, 47 N.W. 155; Minnesota Thresher Mnfg. Co. v. Langdon, 44 Minn. 37, 46 N.W. 310. Section 2600 is not declaratory of the common law, under which the liability of corporate officers for malfeasance was to respond for the loss or damage occasioned thereby. Morawetz, Priv. Corp. §§ 225, 250, 909; 1 Beach, Priv. Corp. § 256; Patterson v. Stewart, supra. Sections 2600 and 5895 do not recognize or impose similar liabilities. Robinson v. Smith, 3 Paige, 222. There is a specific remedy applicable to and corresponding with the liability imposed by section 2600. Merchants' Nat. Bank v. Bailey Mnfg. Co., supra; Dodge v. Minnesota Roofing Co., supra; Johnson v. Fischer, supra; Nolan v. Hazen, supra.

The present action pertains to the creditor alone; it is purely statutory; its object is not to create a fund; it is not fixed or limited; it lacks, therefore, the requisites of an action available to creditors by a bill of equity in behalf of all. It is of quasi penal nature, and is, therefore, enforceable at law in the ordinary manner. Boughton v. Otis, 21 N.Y. 261; Merchants' Bank v. Bliss, 35 N.Y. 412; Chapman v. Comstock, 58 Hun, 325, 11 N.Y.S. 920; Providence Steam Engine Co. v. Hubbard, 101 U.S. 188; Chase v. Curtis, 113 U.S. 452, 5 S.Ct. 554. See Wiles v. Suydam, 10 Hun, 578; Lane v. Morris, 8 Ga. 468.

By section 2600, subd. 2, failure on the part of the directors to post a copy of the corporation's by-laws, a statement of its indebtedness, and the amount of its capital stock subscribed and paid in is sufficient to establish the liability of those guilty of it for the corporate debts. Cincinnati Cooperage Co. v. O'Keeffe, 120 N.Y. 603, 24 N.E. 993; Gadsen v. Woodward, 103 N.Y. 242, 8 N.E. 653; Allen v. Clark, 108 N.Y. 269, 15 N.E. 387; Merchants' Nat. Bank v. Northwestern Car Co., 48 Minn. 349, 51 N.W. 117.

Harrison & Noyes, for appellant First National Bank of Merrill.

G. S. 1894, § 2600, does not purport to create a liability in favor of the corporation. Such a liability already existed by common law. Horn S. M. Co. v. Ryan, 42 Minn. 196, 44 N.W. 56. The liability is in favor of creditors, and they may enforce it as they see fit. It is not an asset of the corporation, and hence does not pass to the receiver or assignee in insolvency. Cook, Stock & Stockh. §§ 212, 218; White v. McCormack, 17 Ohio St. 86; Umsted v. Buskirk, Id. 113; Liberty College Assn. v. Watkins, 70 Mo. 13; Dutcher v. Marine Nat. Bank, 12 Blatchf. 435, Fed. Cas. No. 4,203; Cuykendall v. Corning, 88 N.Y. 129; Wait, Insolvent Corp. § 233. The corporation, on insolvency, cannot assign such claim for the benefit of creditors. Cook, Stock & Stockh. § 218, p. 209, note 3; Bristol v. Sanford, 12 Blatchf. 341, Fed. Cas. No. 1,893; Lane v. Morris, 8 Ga. 468; Arenz v. Weir, 89 Ill. 25. Since the liability is from the stockholders to the creditors, it cannot be enforced by a receiver in insolvency. Cook, Stock & Stockh. § 218, p. 209, note 4; Billings v. Robinson, 94 N.Y. 415; Farnsworth v. Wood, 91 N.Y. 308; Jacobson v. Allen, 12 F. 454; Cutting v. Damerel, 88 N.Y. 410. The action can be maintained only by the creditors in their own right and for their own benefit. Cook, Stock & Stockh. §§ 215, 218, p. 209, note 5; Farnsworth v. Wood, supra; Mason v. New York S. Mnfg. Co., 27 Hun, 307; Billings v. Trask, 30 Hun, 314; Weeks v. Love, 50 N.Y. 568; Mathez v. Neidig, 72 N.Y. 100; Brinham v. Wellersburg Coal Co., 47 Pa. 43; Mansfield I. Works v. Willcox, 52 Pa. 377; Hoard v. Wilcox, 47 Pa. 51; McHose v. Wheeler, 45 Pa. 32; Youghiogheny S. Co. v. Evans, 72 Pa. 331; McCarthy v. Lavasche, 89 Ill. 270; Hull v. Burtis, 90 Ill. 213; Lane v. Harris, 16 Ga. 217; Branch v. Baker, 53 Ga. 502; Norris v. Johnson, 34 Md. 485; Norris v. Wrenschall, Id. 492; Grund v. Tucker, 5 Kan. 70; Dauchy v. Brown, 24 Vt. 197; Windham P. Inst. v. Sprague, 43 Vt. 502; Bassett v. St. Albans Hotel Co., 47 Vt. 314; Paine v. Stewart, 33 Conn. 516; Grose v. Hilt, 36 Me. 22; Haskins v. Harding, 2 Dill. 99, Fed. Cas. No. 6,196.

The purpose of the Minnesota statute is to create the same remedy in favor of creditors which the corporation itself had. Gebhard v. Eastman, 7 Minn. 40 (56); Robertson v. Sibley, 10 Minn. 253 (323); Dodge v. Minnesota Roofing Co., 16 Minn. 327 (368); Merchants' Nat. Bank v. Bailey Mnfg. Co., 34 Minn. 323, 25 N.W. 639; Allen v. Walsh, 25 Minn. 543; Johnson v. Fischer, 30 Minn. 173, 14 N.W. 799; Nolan v. Hazen, 44 Minn. 478, 47 N.W. 155; Patterson v. Stewart, 41 Minn. 84, 42 N.W. 926; State v. Bank of New England, 55 Minn. 139, 56 N.W. 575; Flour C. N. Bank v. Wechselberg, 45 F. 547.

Koon, Wheeler & Bennett, D. F. Morgan, and John M. Shaw, for respondents Washburn, Lowry, Pettit, and Fletcher.

The liability sought to be enforced can be enforced only under G. S. 1894, c. 76. Section 2600, subd. 3, and section 5895, subds. 1, 2, must be construed in pari materia; and sections 5905-5910 provide a specific action and exclusive remedy.

At common law the liability is for damages sustained by the corporation. The right of action is in the corporation or its representative. In cases where a suit may be brought by a creditor or stockholder, it must be a suit in equity in the mature of a creditor's bill in behalf of all persons similarly situated. Hornor v. Henning, 93 U.S. 228; Stone v. Chisolm, 113 U.S. 302, 5 S.Ct. 497; Movius v. Lee, 30 F. 298; Craig v. Gregg, 83 Pa. 19; Houston v. Gregg, Id.; Crown v. Brainerd, 57 Vt. 625; Warner v. Hopkins, 111 Pa. 328, 2 A. 83; Coleman v. White, 14 Wis. 762; Hurlbut v. Marshall, 62 Wis. 590, 22 N.W. 852; Patterson v. Lynde, 112 Ill. 196, 10 Am. & Eng. Corp. Cas. 195; Franklin Ins. Co. v. Jenkins, 3 Wend. 130; Robinson v. Smith, 3 Paige, 222; Brinckerhoff v. Bostwick, 88 N.Y. 52; Merchants' Bank v. Stevenson, 7 Allen, 489; Eames v. Doris, 102 Ill. 350; Horner v. Carter, 3 McCrary, 595, 11 F. 362; 17 Am. & Eng. Enc. Law, 114; Cook, Stock & Stockh. § 135; 2 Pom. Eq. Jur. §§ 1094, 1095; Woolverton v. Taylor, 132 Ill. 197, 23 N.E. 1007; Harris v. Dorchester Parish, 23 Pick. 112; Crease v. Babcock, 10 Metc. (Mass.) 525; Allen v. Walsh, 25 Minn. 543; Johnson v. Fischer, 30 Minn. 173, 14 N.W. 799; Merchants' Nat. Bank v. Bailey Mnfg. Co., 34 Minn. 323, 25 N.W. 639.

The respondents' contentions can be summarized as follows:

(1) The liabilities imposed by G. S. 1894, § 2600, and by section 5895, upon members, directors, and officers vest primarily in the corporation the right of action against such persons for what it has suffered in deprivation of its property and assets. (2) If the corporation refuses to sue suit may be brought in equity by or on behalf of all stockholders whose stock has suffered depreciation. (3) Suits in equity may also be brought by or on behalf of creditors, where the deprivation of corporate assets has rendered their demands uncollectible by suit against the corporation. (4) In no case can a single creditor of an insolvent corporation suing alone maintain an action at law for the enforcement of such liability, unless the statute expressly gives such right of action to a specified class of creditors or for a specified class...