Way v. Barney
| Decision Date | 22 December 1911 |
| Docket Number | 17,360 - (80) |
| Citation | 133 N.W. 801,116 Minn. 285 |
| Parties | CHARLES M. WAY v. FRED E. BARNEY |
| Court | Minnesota Supreme Court |
Action in the district court for Hennepin county by the receiver of the Winslow Furniture & Carpet Company to recover $5,000 defendant's constitutional liability as owner of fifty shares of stock in that corporation. Defendant demurred to the complaint on the grounds it appeared upon the face thereof that: (1) It did not state facts sufficient to constitute a cause of action; (2) the plaintiff had no legal capacity to sue; (3) the court had no jurisdiction of the subject of the action; (4) the plaintiff sought to rely upon section 3, article 10, of the state Constitution, which provision is void because it is a violation of the fourteenth amendment to the Federal Constitution as to equality of laws and because section 3 is inoperative in that the power is given exclusively by the Federal Constitution to pass uniform laws of bankruptcy, and during all the times in the complaint mentioned there was such uniform law in operation and in control of said corporation, and because the proceedings attempted to be had in the trial court prior to the filing of this action against defendant were had without the court having jurisdiction of either the subject-matter or of the defendant in that action, or of the legal representative of the corporation. From an order, Holt, J., overruling the demurrer, he appealed. Affirmed.
Discharge of bankrupt corporation -- stockholders.
The discharge of a corporation under the Federal bankruptcy act does not discharge or extinguish the constitutional liability of its stockholders for the payment of its debts.
Liability of stockholders.
Section 3, art. 10, of our state Constitution, imposing a liability upon the stockholders of a corporation for its debts, is not a violation of the equality clause of the Federal Constitution.
Enforcement of constitutional liability.
Such provision of the Constitution is self-executing, and exists independent of the legislature, which may regulate the procedure for its enforcement, but it cannot destroy the right to have the liability enforced.
Enforcement under general equitable powers.
If for any reason it is impossible to enforce the liability under the statutory procedure, the court will, in the exercise of its general equity powers, give to creditors an adequate remedy in an action in equity to enforce the liability, and may appoint a receiver and authorize him to enforce the liability, as provided by sections 3184-3190, R.L. 1905.
Complaint sufficient.
The complaint herein states a cause of action, and shows upon its face that the plaintiff has capacity to sue, and the court jurisdiction to entertain the action.
Wilson, Mercer, Swan, Ware & Stinchfield, for appellant.
James E. Trask and John M. Bradford, for respondent.
This is an appeal from an order of the district court of the county of Hennepin overruling the defendant's demurrer to the complaint herein.
It appears from the complaint that the action is one by the receiver to enforce the defendant's constitutional liability as a stockholder of an insolvent Minnesota corporation for its debts, and that the corporation was duly adjudged a bankrupt under the provisions of the Federal bankruptcy law, and its assets duly marshaled, and the net proceeds thereof distributed to its creditors who proved their claims.
1. The first contention of the defendant to be considered is that "there is no stockholders' liability in Minnesota in cases where the corporation goes through bankruptcy." The argument of counsel assumes that the corporation was discharged by the bankruptcy court from its debts, a fact not directly alleged in the complaint; but, waiving this point, we have for consideration this question: Does the discharge of a Minnesota corporation in bankruptcy release its stockholders from the liability for its debts imposed by section 3, art. 10, of our state Constitution?
This provision is self-executing, otherwise the legislature by its nonaction could emasculate it, and it creates an individual liability on the part of a stockholder for corporate debts, to an amount equal the amount of stock held or owned by him. The legislature cannot defeat this obligation, but it may prescribe the procedure for the enforcement of the liability. In the absence of such legislation, equity can and will find a way for its enforcement. Willis v. Mabon, 48 Minn. 140, 50 N.W. 1110, 16 L.R.A. 281, 31 Am. St. 626.
The case of Allen v. Walsh, 25 Minn. 543, was one to enforce a statutory liability, and necessarily the remedy prescribed by the statute for its enforcement was exclusive. The constitutional liability is sui generis, yet it is in many respects analogous to that of surety or guarantor, and sustains the relation of surety for the debts of the corporation. Willis v. Mabon, supra; Minneapolis Baseball Co. v. City Bank, 66 Minn. 441, 444, 69 N.W. 331, 38 L.R.A. 415.
The nature of the stockholders' constitutional liability must be kept in mind in considering the effect upon it of a discharge of the corporation in bankruptcy. It was held in the case of Mohr v. Minnesota Elevator Co. 40 Minn. 343, 41 N.W. 1074, that a release of a debt due from a corporation, and a judgment discharging it pursuant to our state insolvency law (Laws 1881, p. 193, c. 148), discharged its stockholders from personal liability for the debt. This rule, however, was changed by Laws 1889, p. 78, c. 30, § 1, which provided: "That the release of any debtor under this act shall not operate to discharge any other party liable as surety, guarantor or otherwise for the same debt." Willis v. Mabon, supra.
This statute, however, can have no relevancy to a discharge of a corporation under the provisions of the Federal bankruptcy act, for the reasons: The scope of the statute is limited by its terms to releases thereunder, and, further, the legislature could not enact any legislation limiting the effect of a release in bankruptcy. Congress has plenary and exclusive power in this respect under the Federal Constitution (article 1, § 8), conferring upon it power to establish uniform laws on the subject of bankruptcies. If state legislatures could, by statute, limit or enlarge in any manner the effect of a discharge of a debtor from his debts under a uniform Federal bankruptcy act, it could defeat the provisions of the act as to a discharge of the debtor.
The question, then, is whether a discharge in bankruptcy of a corporation releases its stockholders, and it must be determined by the terms of the bankruptcy act of 1898, section 16 of which provides:
"The liability of a person who is a codebtor with, or guarantor or in any manner a surety for, a bankrupt shall not be altered by the discharge of such bankrupt." 30 St. 550 (U.S. Comp. St. 1901, p. 3428).
In 1903 (32 St. 797 [U.S. Comp. St. Supp. 1909, p. 1309]) there was added to the act the following:
"The bankruptcy of a corporation shall not release its officers, directors or stockholders, as such, from any liability under the laws of a state or territory of the United States."
The manifest purpose of these provisions is to preserve the creditor's original remedy, notwithstanding the discharge of the corporation, for the collection of the balance of his debt in all cases where some one else, besides the corporation, is also liable in any capacity therefor with the corporation. The discharge of a debtor in bankruptcy does not extinguish the debt, but relieves him from all legal obligation to pay it, leaving unimpaired all remedies for securing payment thereof out of property upon which it is a lien. Hill v. Harding, 130 U.S. 699, 9 S.Ct. 725, 32 L.Ed. 1083; Evans v. Staalle, 88 Minn. 253, 92 N.W. 951; Leitch v. Northern Pacific Ry. Co. 95 Minn. 35, 103 N.W. 704.
It is urged in this connection in effect by the defendant that under the decision of this court in Mohr v. Minnesota Elevator Co., supra, the liability of stockholders for the debts of the corporation is extinguished by its release from its debts, and therefore the bankruptcy act could not create a new liability. The bankruptcy act attempts to do nothing of the kind, but simply to preserve intact all the creditors' remedies for the collection of the balance of their claims against those who were liable in any manner with the corporation therefor, precisely as it preserves the right of creditors to have satisfied the balance of their debts by enforcing liens and trusts securing the same. As already stated, Congress had plenary power by the bankruptcy act to withhold entirely, or to grant, subject to such conditions or limitations as it saw fit, a discharge to a corporation, and by the provisions of the act cited the effect of such discharge is expressly limited. The act creates no new rights in favor of creditors as against parties, other than the corporation, who are liable for its debts, but preserves existing ones intact. The nature of the constitutional liability of stockholders for its debts brings it directly within the limitations of the effect of a discharge of the corporation. We accordingly hold that the discharge in bankruptcy of a Minnesota corporation does not release its stockholders from the liability for its debts imposed by section 3, art. 10, of our state Constitution.
2. The defendant further contends that "the constitutional provision in Minnesota for stockholders' liability is a violation of the equality clause of the Federal Constitution."
The legislature of this state, on March 1, 1872, by Laws 1872, p 59, c. 12, proposed an amendment to section 3, art. 10, of our Constitution, in the precise form and words following: "Each stockholder...
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