Middletown Nat’l Bank v. Toledo, A.A. & N.M. Ry. Co., 197 U.S. 394 (1905)

Middletown National Bank v. Toledo, Ann Arbor

and Northern Michigan Railway Company
No. 167

Argued March 7, 1905
Decided April 3, 1905
197 U.S. 394

CERTIFICATE FROM THE CIRCUIT COURT

OF APPEALS FOR THE SECOND CIRCUIT

Syllabus

Article XIII, § 3, of the Constitution of Ohio of 1851, providing that dues from corporations be secured by individual liability of the stockholders as may be prescribed by law to a further sum over and above their stock at least equal to the amount of such stock, is not so far self-executing that it may be enforced outside of the jurisdiction of that state without compliance with the requirement of the state statute fixing the amount of the liability and the method of enforcing it.

Under § 3260, Rev.Stat., Ohio, the remedy must be pursued in the court of that state, and a creditor who has not commenced any action in the Ohio court cannot obtain the relief given by the statute in the circuit court of the United States in another state against stockholder resident therein.

This case comes here by virtue of a certificate from the United States Circuit Court of Appeals for the Second Circuit which sets forth the following facts:

The case came before the circuit court of appeals by appeal from the decree of the United States Circuit Court for the Southern District of New York sustaining demurrers to the bill of complaint and dismissing the bill. The complainant in the bill was a creditor of the railway company (the defendant), which is a corporation created under the laws of the State of Ohio, and complainant recovered a judgment against the defendant railway company in the Supreme Court of the State of New York, upon which execution was issued and returned unsatisfied. The complainant then brought its bill in equity in the United States Circuit Court for the Southern District of New York, for the benefit of itself and other creditors, against numerous stockholders of the railway company, defendant, residing in the district, to enforce the liability of those stockholders for the debts of the railway company under the laws of Ohio, and that company was made a party defendant.

The Constitution of Ohio (1851), Article 13, section 3, is as follows:

Dues from corporations shall be secured by such individual liability of the stockholders, and other means, as may be prescribed by law; but in all cases, each stockholder shall be liable, over and above the stock by him or her owned, and any amount unpaid thereon, to a further sum at least equal in amount to such stock.

In pursuance of this provision of the constitution, the Legislature of Ohio adopted statutory provisions with respect to the stockholders of certain corporations, which appear in the Revised Statutes of 1880, section 3258, in the following form:

The stockholders of a corporation which may be hereafter formed, and such stockholders as are now liable under former statutes, shall be deemed and held liable, in addition to their stock, in an amount equal to the stock by them subscribed or otherwise acquired, to the creditors of the corporation to secure the payment of the debts and liabilities of the corporation.

Section 3260 of the Revised Statutes of 1880, as amended in 1894, provided as follows:

A stockholder or creditor may enforce such liability by action jointly against all the holders or owners of stock, which action shall be for the benefit of all the creditors of the corporation and against all persons liable as stockholders, and in such action there shall be found and determined the amount payable by each person liable as stockholder on all the indebtedness of the corporation, in which adjudication no costs shall be taxed to nor collected of any stockholder to an amount which, together with the amount to be paid on said indebtedness, will exceed the amount of the stock on which he is liable, provided, that in any such action, the plaintiff may file in the court a sworn statement that a stockholder or stockholders or the legal representatives of a deceased stockholder have not been summoned, giving their residence, if known, and that it is impracticable to secure service of summons upon such stockholders or such legal representatives of a stockholder, and remitting from the claims of the plaintiff, or of other creditors consenting, so much as may be found payable by such stockholders not served with summons except those who may be insolvent or nonresident of the state, and judgment shall be rendered against the stockholders who have been served with summons for the pro rata amount for which they would be liable if all solvent stockholders resident of the state were served with summons, and when a creditor has prosecuted against a corporation an action of [at] law begun before any action to enforce the stockholders’ liability, and has recovered final judgment only after such an action to enforce the stockholders’ liability has been prosecuted to a final decree in the court in which the action was commenced, such judgment creditor may bring a like action against the stockholders of the corporation to enforce such judgment at any time within four years after the recovery of his said judgment, but the stockholders shall not be liable for any amount in excess of that provided in section 3258.

As so amended, this section stood at the time when this suit was begun. Afterwards, in 1900 but before the filing of the second amended bill of complaint, the section, as further amended and supplemented, provided as follows:

SEC. 3260. Whenever any creditor of a corporation seeks to charge the directors, trustees, or other superintending officers of a corporation, or the stockholders thereof, on account of any liability created by law, he may file his complaint for that purpose in any common pleas court which possesses jurisdiction to enforce such liability.

SEC. 3260a. The court shall proceed thereon as in other cases, and, when necessary, shall cause an account to be taken of the property and obligations due to and from such corporation, and may appoint one or more receivers.

SEC. 3260b. If, on the coming in of the answer or upon the taking of such account, it appears that such corporation is insolvent and has not sufficient property or effects to satisfy such creditor, the court may proceed to ascertain the respective liabilities of the directors, officers, and stockholders and enforce the same by its judgment as in other cases.

SEC. 3260c. In all cases in which the directors or other officers of a corporation, or the stockholders thereof, are made parties to an action in which a judgment is rendered, if the property of such corporation is insufficient to discharge its debts, the court shall give notice to nonresident stockholders, as provided in sections 5048, 5049, 5050, 5051, or 5052 of the Revised Statutes, and shall first proceed to compel each stockholder to pay in the amount due and remaining unpaid on the shares of stock held by him, or so much thereof as is necessary to satisfy the debts of the company.

SEC. 3260d. If the debts of the company remain unsatisfied, the court shall proceed to ascertain the respective liabilities of the directors of other officers and of the stockholders, and to adjudge the amount payable by each, and enforce the judgment as in other cases. The court may authorize and direct the receiver to prosecute such action in his own name as receiver, as may be necessary, in other jurisdictions, to collect the amount found due from any officer or stockholder.

SEC. 3260e. Whenever any action is brought against any corporation, its directors or other superintending officers, or stockholders, according to the provisions of this chapter, the court, whenever it appears necessary or proper, may order notice to be published in such manner as it shall direct, requiring all creditors of such corporation to exhibit their claims and become parties to the action, within a reasonable time, not less than six months from the first publication of such order, and, in default thereof, to be precluded from all benefit of the judgment which shall be rendered in such action, and from any distribution which shall be made under such judgment.

SEC. 3260f. Upon a final judgment in any such action against an insolvent corporation, the court shall cause a just and fair distribution of the property and assets of such corporation or the proceeds thereof to be made among its creditors.

SEC. II. That said section 3260 be, and hereby is, repealed.

SEC. III. This act shall apply to pending actions, and shall take effect and be in force from and after its passage.

The court below sustained the demurrer on the following ground:

It is thought that the question raised by this demurrer should be decided upon the assumption that the action is the one provided for by section 3260, Ohio Rev.Stat. as it stood after the amendment of 1894. Inasmuch as that section expressly provides for an action jointly against all the stockholders, including such as are out of the jurisdiction or for other causes cannot be served, and the complaint avers that there are stockholders who have not been made parties, there is a lack of parties defendant, and the demurrer is sustained. If, moreover, the amendments of the statute passed in 1900 are to be considered, the position of the demurrants is even stronger. Manifestly, this action is not the one thereby provided for.