Hawthorne v. Calef

¶1A State statute repealing a former statute, which made the stock of stockholders in a chartered company liable to the corporation’s debts, is, as respects creditors of the corporation existing at the time of the repeal, a law obligation of contracts · Case Law">impairing the obligation of contracts, and void. And this is so, even though the liability of the stock is in some respects conditional, only; and though the stockholder was not made, by the statute repealed, liable, in any way, in his person or property generally, for the corporation’s debts.

¶2The Constitution of the United States ordains that “ no State shall pass any law impairing the obligation of con-, tracts.” With this provision in 'force, the State of Maine, on the 1st April, 1836, incorporated a railroad company; the charter providing that “the shares of the individual stockholders should be liable for the debts of the corporation.” “ And in ease of deficiency of attachable corporate property or estate,” the provision went onto say, “the individual property, rights, and credits of any stockholder shall be liable .to the amount of his stock, for all debts of the corporation contracted prior to the transfer thereof, for the term of six months after judgment recovered against said corporation; and the same may be taken in execution on said judgment, in the same manner as if said judgment and execution were against him individually; on, said creditor, after said judgment, may have his actiorv'on the case against said individual stockholder;, but in no case shall th^.property, rights, and credits of said stockholder be taken in execution, or attached as aforesaid, beyond the amount of his said stock” Another section provides, that if sufficient corporate property to satisfy the execution could not be found, the officer1 having the execution should certify the deficiency' on the execution, and give notice thereof to the stockholder whose property he was about to take; and if such stockholder should show to the. creditor or officer sufficient attachable corporate property to satisfy the debt,- “ his individual property, rights, and credits shall thereupon be exempt from attachment and execution.”

¶3The plaintiff, Hawthorne, who had supplied the corpora*11tion, then embarrassed and insolvent, with materials to build, its road, having obtained judgment as a creditor against it, and being unable to get from it satisfaction (the company-having, in fact,-no property), sued the defendant, Calef, who was a stockholder, both at the time when the debt was contracted and when judgment for it was rendered; and no transfer of whose stock had been made. A few months after ■the debt was contracted, the legislature of Maine passed a statute repealing the “individual- liability” clause of the charter.

¶4On a question before the Supreme Court of Maine, — the highest court of law in. that State, — whether such repeal •was or was not; repugnant to the clause, above cited, of the .Constitution, that court held that it was not; that the original provision, — not making the stockholder ’personally liable in any way, — did not constitute a “ contract” between the creditor and him, within the meaning of the Constitution ; and that, while, but for the repealing, act, the plaintiff ■ would have been entitled to recover of the stockholder individually to the extent of his stock, this repealing act had taken away and destroyed such right.

¶5Judgment being given accordingly, by the said court, in favor .of the State statute, the correctness of such judgment 'was now, on error, before this court.

¶6Mr. Curtis, for the creditor, Hawthorne:

¶7A charter is a contract between the State and the corporation; but not necessarily between them only. If it contain provisions on which third persons are invited to give credit, and which hold out assurances to them that-if they will give credit a certain fund, or certain persons, will become responsible, such assurances, when accepted and acted on, become a contract, the ■obligation of which is protected by the Constitution. Thus ■in Woodruff v. Trapnal*a charter contained the assurance that the. bills'of a bank would be .accepted in payment of ■public dues.; This was held to create a contract with all *12persons wbo should receive tbe bills while the assurance remained unrepealed. So in Curran v. The State of Arkansas,*the charter of a bank contained- an assurance that a certain fund should be responsible for the debts of the bank, and this was-held, to amount to a contract with creditors not to divert that fund from the payment of their debts. It has been held by the courts of New York, that such an act of incorporation as this is leaves the- stockholders to stand as original eon- ■ tractors, • and liable, as such original contractors, for the debts of the corporation; and the fact that the legislature has required the remedy against the corporation to be! exhausted before proceeding against the stockholder does not vary the nature or ground of his liability. In Coming v. McCullough,† the court say:

¶8“ The original stockholders, by their acceptance of the charter, and subsequent purchasers in becoming members, assented and agreed to the terms and conditions of the act of incorporation. The defendant in this suit, in common with- the other stockholders, by his acceptance of the charter, agreed to its terms, and especially to that feature of it so strongly marked, of the individual liability of the stockholders, equally with that of the corporate body, for the debts of the company. It is a liability which every stockholder must be understood to assume and take upon himself, and to be under to those who deal with the company; Dealers contract with the corporation on the faith of that security for the performance of the Contract. The credit they give is given, and they trust as well to the personal liability of the stockholders, as to the responsibility of the corporation, for the fulfilment of the engagement; and each stockholder incurs that liability to the creditor the moment the contract of such creditor with the company is consummated.”

¶9In Conant v. Van Schaich,‡the question now under consideration arose; and it was. held that a law repealing the liability of stockholders was inoperative as to. existing creditors, because it would impair the obligation of their contracts.

¶10Even if it should be held that no contract existed with *13the plaintiff, save his contract'with the-corporation; still, the law in question did impair the obligation of that contract. When the debts were contracted the plaintiff had two remedies: one against the Corporation, the other against the stockholders. The former was, and was known, to be, wholly useless; the latter was sufficient and effectual; and the law in question has destroyed this sole" efficient and -effectual remedy, and substituted no other in' its place. Such a law impairs the obligation of the contract, to enforce which the remedy was given. -The principle which is decisive of this case, was laid down, in Oreen v. Biddle *That principle is, that a law, which so changes the nature and extent of. existing remedies as materially' to' impair the rights of the creditor, impairs the obligation of his contract.

¶11' In Bronson v. Kinzie,† the State law restrained the creditor from cutting .off the right of redemption of mortgaged property, by a sale under a power contained in the mortgage; and gave twelve months, after such sale; to redeem the property. It didmot affect the plaintiff’s right of action against the debtor to recover the debt. It did.not release the.property held as collateral security for the debt; but it encumbered the remedy of the creditor upon his collateral security, so as materially to impair it. For this reason the law was held invalid.

¶12In the case at bar, while the law in question does not affect the plaintiff’s right of action against an insolvent corporation which contracted the debt, it deprives him of all recourse to his remedy on the property of the stockholders, which the charter had made liable for the debt. The difference between the two cases is, that, in the case decided, the collateral remedy for the debt was only materially impaired; in-the case at bar it is destroyed.

¶13In Me Gradeen v. Hayward,‡it was decided that a law prohibiting property from being sold on execution for less than two-thirds of its appraised value; so impaired the remedy as to be invalid, upon the ground that, when the contract was *14made, the creditor had the absolute right to'levy his execution and sell the property of the'debtor. Now in the casé, at bar, the 'charter of the corporation and the law of the State had conferred on the creditor the right to levy his execution on the property of the stockholders, or to subject their property to the payment of the debt by an action on' the case. These laws of the State had, in the language of the court, created this right, and attached it to the contract; it was part of its obligation. As was said.by the court, in Curran v. The¡ State of. Arkansas, “ The obligation of a contract, in the sense in which these words ai;e used in the. Constitution, is that duty of performing it which is recognized and enforced by the laws. And if the law is . so changed, that the means' of legally enforcing this duty are materially impaired, ,the obligation of the contract no longer remains the same.’

¶14Mr. Shepley, contra,.for the stockholder, Calef:

¶15There was no privity of contract -between the creditors of the corporation and the. individual members. They are, therefore, not personally liable, unless this liability is expressly imposed by statute. “ Such liability,” says Shaw, C, Jl, in Gray v. Coffin,* “ is a wide departure from the established rules of law, and is, therefore, to be construed strictly, and is not to be extended beyond the limits to which it is carried by positive provisions of the statute.” "

¶16Then the provisions relied on to give this personal responsibility recognize the corporation as an entity, capable of contracting debts; and these are its debts, and not the-debts of' any other party. No other person is made liable for them ; nor is even any other thing made liable for them, originally, pr absolutely, or wholly, or permanently. “ The shares of individual stockholders shall be liable for the debts' of the corporation.” And only in case of deficiency of attachable eoi’-porate property, the individual property, rights-, and credits of any stockholder shall be liable, to the amount of his stock.-. *15This property might be taken on the execution, which had been issued on the 'judgment against the corporation, to which the stockholder was no party; or, the creditor might have his action on. the ease, on the statutemanifestly to reach, by the procesé of foreign attachment, the “ rights and credits,” which could not be reached by the execution against the corporation. But in no case could property, rights, and credits of a-stockholder be taken .in execution or attached, beyond the amount of his stock. And the stockholder, could exempt his property entirely from the execution' and attachment, by disclosing and showing sufficient attachable' corporate property.

¶17In all this, there-is no recognition of any contract On the part of the stockholder, or liability under contract. The remedy, to enforce whatever liability the statute creates, excludes the theory of contract. It is a statute remedy, to enforce a statute burden against the property of the stockholder.

¶18What, then, the plaintiff had, was a remedy created by statute. And the. legislature has power to take away by statute that remedy which statute alone gave. The exception is, that it may not take away vested rights. But the rights of a party, when they exist only to the extent of statute, remedy, are not vested Until after judgment.

¶19It will be conceded that the legislature might take away and destroy all legal process for compelling the corporation to perform its contract, and still leave the liability of the stockholder’s property, and the creditor’s statute right against that, unimpaired. So it may take away and destroy all power to enforce any rights against the stockholders, or their property, and leave the obligation of the corporation’s contract unimpaired."

¶20The obligation of the' maker of a promissory note is different from ■ that of the indorser or guarantor of the same note. But the holder has two remedies, — one against the maker, the other against the indorser or guarantor. A .law which should take away the remedy against the indorser or guarantor, would not impair the obligation of the maker’s *16contract expressed in tbo note, — though, it would impair the obligation of the contract with the indorser or guarantor. If, now, the liability of the indorser or guarantor, instead of arising from a contract, were arbitrarily imposed by a statute, which declared, that whenever a promissory note was made for a good consideration, certain relatives of the maker, or neighbors, or religious, or literary, or political, or business associates of his, should be liable, as guarantors or’ indoi’sers of such note, who would be bold enough to contend, that the repeal of such statutory liability would impair the obligation of the contract between the maker and the payee of such note ? It would add no strength to an argument in support of such a proposition, to say, that when the payee of the note parted with the consideration for it,' he trusted to this liability which the statute imposed; or that the maker was insolvent, and the remedy against him was insufficient and useless, and that the repeal of the statute liability of the other persons had taken away and destroyed the only sufficient remedy which the payee had.

¶21As respects the authorities cited by Mr. Curtis: Woodruff v. Trapnal, and Curran v. The Slate of Arkansas, were both decisions on the same charter, that of an Arkansas bank, and both rested upon special facts.

¶22The legislature of Arkansas had chartered a banking corporation, of which the State was the sole owner; and in the charter had declared that the bills of this bank, which was nothing but an agent of the State itself, should be received in payment of debts due to the State. The bank, by its charter, was simply a convenient agent of the. State to negotiate between the State and third parties, and its, bills were substantially bills of the State of Arkansas.

¶23Speaking in another case* of its own decision, in Wood-ruff v. Trapnal, this court has said :

¶24- “We -held that the charter constituted a contract between the State and the holder of the bills of the'bank; that the pledge of the State to receive the notes of the bank, in payment of debts, *17was a standing guarantee, .which embraced all the paper issued by the bank until the guarantee was repealed: and that this construction was founded upon the fact, that the hank belonged exclusively to the State, was conducted by its officers, and for its benefit. That, in this respect, the obligation of the contract applied to a -State equally as to an individual; and that as to the binding force of a similar guarantee by an individual, there would seem to be no ground for doubt.”

¶25To make the cage at fear analogous to this, the stockholder's sof our railroad company should he the supreme power which chartered the company; so that the charter, instead.of. feeing a contract between the State and the stockholders, should fee a contract between the stockholders who created j.t, and the community who accepted and acted upon its guarantees, voluntarily inserted in it by these stockholders. The State of Arkansas had, in the eases relied on, promised to receive the bills, of their bank, expressly, by its charter, made by the State: The stockholders of this railroad company simply submitted to ■“ liabilities and duties,” to which the legislature .compelled .them- to be “ subject.'” ■

¶26The New York decisions- furnish still less support- to the plaintiff’s counsel. IJhe passage from the opinion in Coming v. McCullough, in its reasoning, does, indeed, primd fade, 'sustain this position ; and if, as.the counsel affirms, this reasoning were predicatéd upon-“such an act of incorporation” as that which incorporated the railroad company in Maine, it would have some weight, though it would- not, to this, court, be an authority. ■ But the language of the charter there was, “ that the stockholders of the corporation shall be, jointly and severally, personally liable for the payment of all debts and demands contracted by the corporation.” By their charter, those stockholders were liable for the payment of all debts and demands, not of the corporation,, but contracted by the corporation. They were the stockholders’ debts, as well as the debts of the corporation, — contracted by the corporation, as if it were the agent of the. stockholders. The stockholders were liable; not the “property,, rights, and Credits” of the stockholders, nor their “ shares,”' *18but the' men themselves. They were liable for the payment of all debts and demands; not to the amount of their stock or shares which they severally owned, only. They were liable in the first instance, at the very creation of the debt or demand ; not only in case of deficiency, of corporate property. They were liable permanently; as long as the debt remained a debt; not for ay par only after the transfer of their stock, or'six months after -judgment recovered against the corporation, on a suit brought within such year; but forever, if the debt was kept alive; without auy power of exonerating themselves by showing corporate property.

¶27When ConantY. Van Schaick — the'other New York case relied o’n-^-was decided, -a general statute of the State had created .certain corporations, by language precisely identical with that in the charter considered in Corning v. Me Cullough ; and the liability of stockholders of one of these corporations was, on the authority of Corning v-. McCullough, held to "Test on a contract, at common law, and, therefore, a statute. repealing such liability was held, to impair the obligation of a contract.

¶28■Reply: The, only question is, whether, when the repealing law destróyed the .existing right of action by the plaintiff against the defendant- to recover from, him the amount of the debt due to him from the .corporation, it impaired the obligation of a contract ? • One argument of the other side is, that the right of the plaintiff was created by statute; that the legislature have power to take away by statute what was given by statute, except vested rights; .and that the right of a party when it exists only by statute, does' not become vested till after, judgment. But this is erroneous doctrine when applied to this case.

¶291. The right of the plaintiff was not created by statute, and -did not exist “ only by statute/’ It is true there was a statute in existence which enacted that if the -plaintiff should -sell merchandise to a corporation which should fail to pay for it, he' should have a right of action against any one of its. stockholders to recover-its price, to the amo Lint of his stock. *19But tbis law did - not create tbe . plaintiff’s Yzy fe!. -Tbis plaintiff parted witb bis merebandise to an; insolvent corporation on the faith of this liability wfyich the defendant, by'taking stock, had assented to be subject to. The only effect of tbe law was to apprise tbe parties that if sucb a sale should be made, tbe defendant would come under a legal obligation to the plaintiff to pay tbe debt, and to create that' legal obligation upon tbe sale; just as tbe law apprises tbe vendee of goods, that he will come under a legal obligation to tbe vendor for tbe price, and creates that legal obligation on tbe sale. Tbe right'in neither case is created by the law alone; but in both cases the law does create tbe legal.obligation; and in one case just as entirely as in the other. It may be true that a statute may take away what a statute has given, except vested rights. But tbe question still remains whether tbis •plaintiff had not a vested right to the obligation of the defendant, and to some adequate remedy to enforce that obligation. In McCracken v. Hayward the right of the plaintiff to sell the defendant’s property on execution was-, given by a State law. Yet it could not be taken away or impaired by’ a State law, because tbe creditor bad a vested right to some adequate remedy, such as existed when his contract was made. This- plaintiff sold his property to an insolvent corporation on the faith óf the obligation of the defendant to pay for it, and of tbe remedy the law then allowed him to enforce tbe obligation of the defendant to perform the contract. .

¶30If A. is under a complete legal obligation to B. to perform the contract of C., which B. can enforce by an action against A., and which contract B. made on tbe faith of A.’s obligation to perform it, has not B. a vested right to have A., perform the contract? 'and can A.’s obligation be released bylaw without impairing tbe obligation of a contract-, within-the meaning of tbe Constitution ? It is A.’s duty to perform tbe contract. Thai duty is recognized and enforced by the law. The law is so changed that this duty can no longer be enforced.. The obligation of the contract which A. was under is released. Is it any answer that C., an insolvent debtor, is yet *20under the obligation of the contract? The contract created two perfect and complete and several obligations, — one of A., the other of C. One.is as much the obligation of the contract as the -other.

¶31■ It is an unfounded assumption that the obligation of a contract can be incumbent only on the party that makes the promise.

¶32The obligation of a contract is a duty of performing it recognized jand enforced by the laws. An .executor or administrator, though he has made no promise, is under a • legal duty to perform the contracts of the deceased; the obligation of the contract is incumbent on him; and a State law releasing him would as clearly impair the obligation of the contracts of. the deceased as a law releasing the living debtor. So a husband is bciund to perform the. contracts of his wife before marriage. Without making any promise, he takes on himself the legal duty of performing these contracts of hers, by voluntarily entering into the marital relation at a -time when ■ and place where the law made this duty incumbent on him. Could he be-released without impairing the obligation of such contracts ? For still stronger reasons was the obligation of this contract incumbent on the defendant. He voluntarily entered into such relations with this corporation as created a perfect legal obligation- to pay this debt when it was contracted, and the plaintiff parted with his property to an insolvent corporation on'the faith of this legal obligation incumbent on the defendant.

¶33The defendant’s counsel has pointed out a supposed distinction between the cases cited from the New York reports and this case. It is that, in those cases, the charters made the stockholders jointly and severally liable for all the debts and demands contracted by the corporation. But the defendants' were not contractors. The' contracts were made by a third person, viz., the. corporation. The relation of the stockholders to the contracts was not created by the contracts ihem-selves, but by the law, as in this case; and the obligation of this defendant to perform this.contract is as complete and perfect, *21and arises from tbe same causes as the obligations of the defendants in the cases in New York.

¶34In those cases, as in this case, there was a liability created by .law, and made incumbent on one person to perform the contracts of another person. If that liability could not he discharged without impairing the obligation of a contract, how can this liability be discharged without a similar violation of the Constitution ?