1 Hosea's Rep. 496

George W. Harris v. Cincinnati, Hamilton and Dayton Railway Company et al.

1. A creditor’s right of action against stockholders to enforce their double liability does not accrue when the corporation becomes insolvent merely in the sense that its property is insufficient for the payment of its liabilities.

2. This is especially true where the insolvency is of a new corporation formed by consolidation of others to whose stockholders the double liability is invoked. Non constat but the old company may be solvent, while the consolidated company may be hopelessly insolvent by reason of the debts of' the constituent companies.

Hosea, J.

Demurrer to petition.

Plaintiff sues as the holder of a bond of defendant payable in 1.942, in. the sum of $1,000,' issued by a constituent corporation of the present defendant company, whose liabilities, it is alleged, were assumed by defendant company-in the consolidation.

The special ground of the action — which is a general creditor s bill to enforce the double liability of stockholders, named — is thus stated:

*497“Said defendant * * * company is insolvent and has been insolvent for several months past, and in Cause No. - of the Circuit Court of the United States * * * admitted its insolvency, and thereupon in said action a receiver was appointed for such reason.”

Ancillary to the purpose of the suit stated are allegations and a prayer for discovery of the names of all stockholders from 1895.

The general rule, in Ohio, as elsewhere, is that a suit of this nature to subject stockholders to their double liability can only be brought upon a claim against the corporation reduced to judgment and execution returned nulla bona. This rule is so well established as to render it unnecessary to cite authorities.

It is not an arbitrary rule, but is the logical deduction from the legal facts of the situation. The corporation is the principal debtor and the stockholder is only secondarily liable as a guarantor to the extent of his statutory liability. The corporate property is the primary fund for payment of the corporate debts and the statutory liability of the stockholder is a security to be resorted to only where payment of debts can not be enforced against its property. In a word, it is to all intents an equitable asset and the suit to subject is in the nature of a proceeding in aid of execution — a supplementary proceeding.

While this is the rule, courts of equity recognize exceptions and in certain cases uphold the right to sue without requiring a reduction of the claim to judgment, where the corporation itself is actually in process of liquidation— as upon dissolution or bankruptcy proceedings. This obviously just execution is in accordance with the principle that a court of equity will not insist upon requirements that are vain, where it is clearly necessary for the protection of a meritorious claim to prevent unnecessary and perhaps fatal delays.

These principles are recognized in this state as the basis of the law enforced in its courts. Hays v. New Balt. TurnPike Co., 1 Handy, 281; Piatt v. St. Clair, 6 O. S., 277; Bamberger v. Turner, 13 O. S. 263; Bawrick v. Gifford, 47 *498O. S., 184; Bronson v. Schneider, 49 O. S., 438; Younglove v. Lime Co., 49 O. S., 663; Kulp v. Fleming, 65 O. S., 338.

The petition in this case fails to state a case for the enforcement of this secondary liability of stockholders. The plaintiff’s claim is not due, and, moreover, the allegations raise a strong presumption that his bond represents a debt fully secured upon the corporate property; and it is therefore fairly inferrable that he became a creditor of the corporation, not in reliance upon the property of the corporation and the guaranty of the stockholder, but upon the immediate and direct security by way of mortgage which thus set apart the corporate property to his specific security. But even if the bond is not secured by mortgage, equity secures it by raising an equitable lien superior to all subsequent claims, except as against a subsequent innocent purchaser for value paid, without notice; and this lien is good even as against a subsequent mortgage. Compton v. Railway Co., 45 St., 592.

The obvious purpose of the law of double liability is to give general creditors who deal with the corporation upon the faith only of a general creditor’s claim upon the corporate property in the ordinary course of business, an additional security which tends to promote good faith on the part of corporate officers by making it to the interest of stockholders to see to it that good faith is observed. On principle, therefore, a creditor who deals at- arm’s length and secures himself at the expense of general creditors by mortgage upon the corporate property should not be entitled to the guaranty afforded by the double liability of stockholders, unless, in analogy to this principle of the bankruptcy law, he places himself in the situation' of a general creditor by surrendering his special security, or at least until and to the extent that he is able to show that his security is inadequate.

The only allegation in the petition here is that the consolidated company — not the mortgagor — is insolvent. But this is not sufficient to make the case an exception to the general rule first stated. The insolvency and the receiver*499ship referred to in the cases upholding the exceptions to the rule, are conditions such as dissolution proceedings, bankruptcy, etc., which necessitate a winding up and general liquidation of the company’s affairs. In Ohio this is made clear in many cases and it is necessary to refer only to the two cases reported in 49 O. St. (supra).

In Bronson v. Schneider (p. 438 et seq.), the general rule and the exception are clearly discussed, and the right of action j;o enforce double liability is held to arise only where—

“The property is by some legal proceeding put in process of application to the payment of its (the corporation’s) debts so as to render a judgment against it impossible. or nugatory, as where the corporation is dissolved or thrown into bankruptcy, or placed in the hands of a receiver, or has assigned for benefit of creditors.”

In this statement the illustrations must be held to conform to the thing illustrated, and consequently the receivership indicated must be one involved in some winding up proceeding where the property is “put in process of application to payment of debts.”

But this is placed in a clearer light in the case of Younglove v. Lime Co. (p. 663), where, on page 666, the court is at some pains to illustrate the distinction by reference to a receivership in that case as one not made because of insolvency necessitating a winding up of its affairs, 'and by way of antithesis, says:

“Any inference that his appointment was for the cause or purpose named is inconsistent with the fact that for nearly three years he carried on the business of the company under the direction of the court, and then, by its order, restored the property to the company.”

On page 667 the court further says:

“The creditor’s right of action against the stockholders does not accrue when the corporation becomes insolvent merely in the sense that its property is insufficient for the payment of its liabilities.”

The above citations do not exhaust the.list of Ohio cases bearing upon the subject and declaring the same principles.

*500Burch & Johnson, for plaintiff.

Edward Colston, for defendant.

There is, however, a further principle involved, arising out of the fact that the defendant here is not the debtor, but the successor in title of the debtor under the railroad consolidation act. The petition shows that the consolidation was effected after the bond in question was issued and claims the light to sue by reason of the alleged insolvency, not of the original debtor, but of the consolidated successor. The statute indeed casts upon the consolidated company the liabilities of its constituents; but provides that all rights of creditors and all liens upon the property of either of such companies shall be preserved unimpaired. (R. S., Sec. 3384).

What is sought to be enforced in this case is a secondary liability, not of the original company, but -of individual stockholders of the consolidated company. It would seem that the individual liability of the contingent company should not be shifted to the stockholders of the new company by the mere act of consolidation and could not be legally assumed unless 'by written- agreement of each new stockholder, under the statute of frauds; for which reason also, as it seems to me, the petition is defective.

And this suggests another objection, namely, an allegation of the insolvency of the new company per se, would not necessarily imply the insolvency of the original, company. The original, company is “deemed to be in existence” to preserve the rights of creditors (R. S., Sec. 3384). Non constat but the old company may be entirely solvent, even while the consolidated company may be hopelessly insolvent by reason of the debts of the other companies. Compton v. Railway Co., 45 O. S., 592 (618-20).

For these reasons and others not necessary to elaborate, the petition in this case seems to me defective and the demurrer must be sustained.

Demurrer sustained.

Harris v. Cincinnati, Hamilton & Dayton Railway Co.
1 Hosea's Rep. 496

Case Details

Harris v. Cincinnati, Hamilton & Dayton Railway Co.
Decision Date
Jan 1, 1970

1 Hosea's Rep. 496




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