Wolverton v. Taylor

• Decision Date: 29 March 1890
• Citation: 23 N.E. 1007,132 Ill. 197
• Parties: WOLVERTON et al. v. TAYLOR et al.
• Court: Illinois Supreme Court

132 Ill. 197

23 N.E. 1007

WOLVERTON et al.

v.TAYLOR et al.¹

Supreme Court of Illinois.

March 29, 1890.

Appeal from appellate court, first district.

SHOPE, C. J., and BAILEY, J., dissenting.

Consider H. Willett, for appellants.

Edward F. Gorton and Edward W. Russell, for appellees.

WILKIN, J.

Bill in chancerty, by appellants against appellees, to enforce an alleged liability against the said George H. Taylor and William H. Langley as directors and president and treasurer of a corporation called ‘Geo. H. Taylor & Co.,’ under section 16, c. 32, Rev. St., entitled ‘Corporations.’ The bill is on behalf of appellants, and all other creditors of said corporation who shall come in and contribute to the expense of the suit. It was filed in the superior court of Cook county on the 12th day of January, 1888. It appears from the allegations of the bill that said George H. Taylor & Co. was duly organized as a corporation, under the laws of this state, for the purpose of manufacturing, purchasing, and selling paper bags, and other articles pertaining to the paper trade, and that while engaged in carrying on its said business it executed 12 certain promissory notes payable to the order of Lucius Clark & Co. These notes were all executed more than five years prior to the filing of the bill, but between the date of their maturity and the bringing of the action less than five years had elapsed. They were for different amounts, running from $725 to $1,252,-aggregating about $10,000. Prior to the filing of this bill, two of these notes had been assigned by said payee, Lucius Clark & Co., to the complainant Wolverton, four to the complainant the North-Western National Bank of Chicago, and six to complainant Charles A. Clark. It is alleged in said bill that when said notes were executed, and the indebtedness for which they were given contracted, the defendant George H. Taylor was director and president, and the said William H. Longley was director and treasurer, of said corporation, and at said time the indebtedness of said corporation exceeded its capital stock, of $50,000 to the extent of $100,000, to which said Taylor and Longley, as such directors and president and treasurer, assented. It is also alleged in said bill that said corporation is insolvent, and has ceased to do business. The statute of limitations having been set up by defendants by way of demurrer to the bill, complainants, by leave of court, filed an amendment thereto, in which they alleged that they had no knowledge of the fact that the indebtedness of the said corporation exceeded its capital stock until its financial failure and refusal to pay its debts, February 28, 1883, and that, if any cause of action accrued to them at the date of said notes, the holders of the same at that time, and the complainants since, had no knowledge of the existence of such cause of action, which was fraudulently concealed from the holders of said notes by said defendants until February 28, 1883. To the bill as thus amended defendants again demurred,alleging as special cause therefor that it appeared upon the face of the bill that the cause of action sought to be enforced against them did not accrue within two years nor within five years prior to the commencement of the suit. The superior court sustained the demurrer, and dismissed the bill, at complainants' cost. The appellate court of the first district affirmed that decree, and complainants below again appealed.

The section of the statute under which the bill is filed is as follows: ‘If the indebtedness of any stock corporation shall exceed the amount of its capital stock, the directors and officers of such corporation assenting thereto shall be personally and individually liable for such excess to the creditors of such corporation.’ Rev. St. Ill. c. 32, § 16. No question is made as to the sufficiency of the bill to charge appellees under this section, had it been filed in apt time. The sole question for decision is, do the facts stated in the bill bring the cause of action within the bar of the statute of limitations?

The demurrer is based upon two propositions, viz.: (1) The liability of appellees, if any exists, is for a statutory penalty, the cause of action against them accruing immediately upon their assenting to the excessive indebtedness; and therefore the two-years bar, under section 14, c. 83, Rev. St., entitled ‘Limitations,’ was complete when the bill was filed. (2) Although the liability is not penal, the cause of action accrued at the date of contracting the excessive indebtedness; and therefore the five-years bar, under that clause of section 15, c. 83, which provides that all civil actions not otherwise provided for shall be commenced within five years next after the cause of action accrued, had run before the bill was filed. To the first of these propositions, appellants reply, the action is not for the recovery of a statutory penalty; and to the second, that, the liability not being penal, the cause of action did not accrue until said notes became due, and therefore five years had not run when the bill was filed.

A penal statute is defined to be ‘one which imposes a forfeiture or penalty for transgressing its provisions, or for doing a thing prohibited.’ Potter, Dwar. St. 74. A penalty ‘is in the nature of punishment for the non-performance of an act, or for the performance of an unlawful act.’ It involves the idea of punishment, whether enforced by a civil or criminal procedure. And. Dict. Law, 763. In the absence of statutory prohibition, it is not unlawful for the officers of a corporation to contract debts in excess of its capitalstock. Unless restricted by statute, corporations, as individuals, may contract debts to the full extent of their credit, without reference to the amount of their capital stock. Neither is it, under all circumstances, bad management in a corporation to contract debts in excess of the amount of its capital stock. Its assets may be of such value as to give it credit, and warrant the incurring of liabilities far beyond that amount. While statutes in some states, by different forms of language, limit the right of such officers to contract indebtedness beyond prescribed limits, in others no restriction whatever has been enacted; and in many of those in which a limit is prescribed the indebtedness which may be contracted is not limited by the amount of capital stock, but may equal twice or three times that amount. If, therefore, such enactments are to be understood as indicating that it is deemed unwise to allow corporations to incur liabilities beyond a prescribed limit, it must be admitted that the sentiment is by no means harmonious as to where the limit should be placed. These statutes do not, therefore, indicate, as contended by counsel for appellee, that legislatures have considered it bad management in the affairs of a corporation to contract debts beyond the amount of its capital stock. Section 16 of our statute does not prohibit the contracting indebtedness in excess of capital stock; neither does it, in terms, inflict a penalty for so doint. Therefore a prohibition cannot be implied; and to say, as counsel insist should be done, that the assenting is made unlawful by the infliction of a penalty, is to assume the very question controverted. While it is true that statutes of other states, making officers of corporations individually liable for contracting debts beyond a prescribed limit, have been held to be penal, the language of those statutes will be found materially different from ours, and, so far as we have been able to ascertain, expressly prohibit the incurring of liabilities beyond certain limits fixed. In Hornor v. Henning, 93 U. S. 228, the supreme court of the United States, in passing upon an act of congress regulating corporations in the District of Columbia, the language of which is almost identical with that of our statute, held that the act was not penal, for reasons which we think unanswerable. We followed that decision in Low v. Buchanan, 94 Ill. 76, in holding that the liability created by section 16 could only be enforced in chancery; and this is, in effect, deciding that the action is not for the recovery of a penalty. ‘It is a universal rule in equity never to enforce either a penalty or a forfeiture.’ 2 Story, Eq. Jur. § 1319; Queenan v. Palmer, 117 Ill. 619, 7 N. E. Rep. 613. In 2 Mor. Priv. Corp. § 908, it is said: ‘It is not always quite clear what the courts mean to express by saying that statutes of this character are penal, and that they impose upon the directors a penal liability. The liability of directors under such a statute is undoubtedly not the result of a contract between the directors and the creditors of the corporation; but that is evidently not what the courts mean to express. The liabilities of directors to creditors for a tort, or a misapplication of corporate funds, or a breach of trust, does not arise out of contract; yet the courts would certainly not call this a penal liability or refuse to enforce it because it arose under the laws of a foreign state. Nor is the liability of the directors under these statutes penal in the sense in which the word ‘penal’...