Opinion
Argued April 28, 1881
Decided October 4, 1881
Samuel Hand for appellant. Chas. H. Searle for respondent.
This action, in so far as it is based upon an alleged violation of section 12 of the General Manufacturing Law of 1848, cannot be maintained. The liability imposed by that section is for the failure of a manufacturing corporation to make, publish and file, within the time prescribed, a report "which shall state the amount of capital, and of the proportion actually paid in, and the amount of its existing debts;" and for such failure of the corporation, all the trustees are made liable. In the present case there was no such failure on the part of the company. It did, within due time, make a report which, in form, complied with the statute, stating as follows: "Capital stock, $60,000; capital paid in, $36,500; amount existing debts, $30,130.24." This report covered all the points required by section 12 and, if true, was a full compliance with the statute. It is objected by the plaintiff that it was not a valid report, because, in point of fact, only $11,500 of the capital had been actually paid in, and the residue $25,000 had been issued for property purchased by the company; and chapter 333 of the Laws of 1853 required that such stock should not be reported as issued for cash paid in to the company, but should be reported according to the fact. This objection relates to the truth of the report, and not to its sufficiency as a formal compliance with the statute. If it were tenable it would render all the trustees liable for the falsity of the report, including those who did not know that the capital represented as having been paid in had not all been paid in to the company in cash, and even those who had not signed the report. There is nothing on its face to show that any property had been purchased or stock issued under the act of 1853, and the fair import of the statement that $36,500 of capital had been paid in was that it had been paid in to the company in the manner required by the act. If this statement was untrue and constituted a false representation, it rendered liable only the trustees who signed the report knowing it to be false. But the mis-statement was not equivalent to an entire failure of the company to make the required report, which would render all the trustees liable. The case of Bonnell v. Griswold ( 80 N.Y. 128) is decisive of this point.
The trial judge has, however, found that the defendant, one of the trustees who signed the report, knew at the time that only $11,500 of capital had been paid in in cash, and that of the $36,500 reported as paid in, $25,000 had been issued in payment for property purchased by the company. The complaint charged that the representation in the report as to the amount of capital paid in was false, and the judge found that the report was in violation of section 15 of the act of 1848, which is as follows: "Sec. 15. If any certificate or report made, or public notice given by the officers of any such company, in pursuance of the provisions of this act, shall be false in any material representation, all the officers who shall have signed the same, knowing it to be false, shall be jointly and severally liable for all the debts of the company, contracted while they are stockholders or officers thereof."
The questions, therefore, on which the case turns are whether the statement in the report as to the amount of capital paid in constituted a material representation, and was false, and whether the report was signed by the defendant, knowing it to be false within the meaning of section 15.
The materiality of the representation scarcely admits of question. The purpose for which the annual reports are required to be published is that the public may be correctly informed of the financial condition and resources of these companies, in order that they may judge of the credit to which they are entitled; and it cannot be doubted that the amount of actual cash capital invested in their business is a most material element in such an inquiry. The statute, therefore, requires that the amount of capital actually paid in be stated in the report. By section 14 of the act of 1848 it is declared that nothing but money shall be considered as payment of any part of the capital stock, and a statement that a certain amount of capital stock has been paid in, when contained in a report made in pursuance of the statute, upon a careful consideration of its provisions, necessarily imports that it has been paid in money, no other mode of payment being recognized. By the supplementary act of 1853, the trustees are authorized to purchase property necessary to the business of the company, and issue stock to the amount of the value thereof in payment therefor, which stock is declared to be full stock, not liable to further calls. But stock so issued cannot be regarded as issued for capital paid in, and the act of 1853 specially provides that in all reports of the company to be published, such stock shall not be stated as issued for cash paid in to the company, but shall be reported in this respect according to the fact. Even in the absence of this provision it would be manifestly incorrect to report the nominal amount for which such stock was issued, as capital paid in to the company, especially in view of the provision of section 14, that nothing but money shall be considered as payment of any part of the capital.
But the express prohibition of the act of 1853 prevents any possible misunderstanding as to the meaning of the term capital paid in, and makes it clear that a statement in a report published under the Manufacturing Law, that a certain amount of capital has been paid in, must, on a strict view of the statute, be regarded as a representation that such capital has been paid in in cash, unless it is specified that the alleged payment consists of the issue of stock for property purchased.
I think, therefore, that it is impossible to escape the conclusion that the report in question contained an untrue representation as to the amount of capital paid in, and that this representation was material.
But the important question still remains whether the defendant signed the report "knowing it to be false," within the meaning of the statute. It is admitted that he knew that only $11,500 had been paid in cash, and that $25,000 of the stock had been issued for property purchased, and therefore he knew that $36,500 had not been paid in cash. But he did not certify in terms that that amount had been paid in cash, and it is only by a process of reasoning that it is established that the statement imported a representation that it had been so paid. There is no evidence that the statement was made with any fraudulent intent, or that he did not consider the property purchased as fully worth the amount of stock issued in payment therefor. The act of 1853 declares that stock so issued shall be full stock, and if, believing that he had the right to treat all the stock issued, as representing so much paid-up capital, and without any intent to evade the statute or to defraud any one, he signed the report under that belief, did he incur the penalty?
We are of opinion that the words "knowing it to be false" import a willful misrepresentation, with actual knowledge of its falsity, and not merely such constructive knowledge as can be imputed from the presumption that the officer signing the report knew the law and comprehended the precise import of the language used, when construed with reference to statutory provisions. In the absence of the provisions that nothing but cash shall be considered as payment of capital, and that if stock is issued for property, it must be so specified, a general statement that so much capital had been paid in would not, in common parlance, be very far from correct, even though the capital had not been all paid in cash.
To charge the officer with the severe penalty imposed for signing a false report, knowing it to be false, some fact or circumstance must be shown indicating that it was made in bad faith, willfully, or for some fraudulent purpose, and not ignorantly or inadvertently; and this is a question of fact which must be passed upon before the liability can be adjudged.
In Waters v. Quimby ( 27 N.J. Law, 296; affirmed in error, 28 id. 533), twelve persons owning a factory, patent-rights, tools, etc., which had cost them $36,000, formed themselves into a corporation and transferred the entire property to it at a valuation of $252,000, for which stock was issued to them. It appears that they went through the ceremony of paying in the money for the stock and drawing out their proportions of the purchase-money, and the officers then filed a certificate that the capital stock had been paid into the treasury in cash. In an action for making a false certificate, the court submitted to the jury the question whether the transaction was merely colorable and resorted to for the purpose of a formal compliance with the statute, and the jury found for the plaintiff. In reviewing the judgment, the court say, that whether there was fraud in the transaction was a question peculiarly for the jury, and that it might perhaps be maintained that the acceptance by the company from a third party of property necessary for its operations, at a fair value, in exchange for stock, is a payment in cash within the meaning of the statute, and that the payment to the corporation of the price of the stock, and the repayment of the money in purchase of the property would not vary the transaction; but that conceding that the law would admit of that latitude of construction, the transaction before the court was of a totally different character. In that case it will be seen the recovery was sustained on the ground of mala fides, although the penalty is imposed by the New Jersey statute for merely making a false certificate, and the words "knowing it to be false" are omitted.
But in Massachusetts the language of the statute is identical with that of section 15 of our statute, and it is there held that bad faith must be shown. In Stebbins v. Edmands (12 Gray, 203), which was an action for making a false certificate that the capital ($130,000,) had been paid in, it appeared that only $40,000 had been paid in cash and $90,000 of stock had been issued in part payment for an exclusive license under a patent. The plaintiff, however, admitted upon the trial that the defendants, when they signed the certificate, believed the right under the patent to be worth $100,000. They paid the inventor therefor $10,000 in money and $90,000 in stock. On these facts the court directed a verdict for the defendants, and in affirming the judgment in the Supreme Court, BIGELOW, J., commenting upon the words of the statute, "knowing it to be false," observed that it was not enough to show that the certificate did not contain the exact truth, according to the strict legal interpretation of the statute, but that it must be made to appear that it was wilfully false; that is, made intentionally, with a purpose to deceive, and that the scienter or guilty knowledge intended by the statute, must be equivalent to mala fides in making the certificate. It is proper to observe that the statute in force in Massachusetts, when this decision was made, did not declare that nothing but cash should be considered as payment of capital, nor did it require that if stock was issued for property, the fact must be stated in all reports, etc. The only provision on this subject was that a note or obligation of any stockholder, secured by pledge or otherwise, should be considered as payment of any part of the capital stock; but, notwithstanding the difference in the statutes, the construction put upon the term, "knowing it to be false," is quite applicable to the present case, the statute in other respects being similar to ours. (R.S. [Mass.], ed. 1845, chap. 38, §§ 13, 16, 17, 24, 28.) Where the report is false in a material point, and plainly proven to have been known so to be to the officer signing it, it can hardly be necessary to prove the purpose for which the misrepresentation was made, or that any particular fraud was intended, as, if a trustee should knowingly state that a larger amount of capital had been paid in than had in fact been paid, or state the indebtedness of the company at less than the actual amount. But when the knowledge of the trustee is not directly proven, but is matter of inference, the existence of a guilty motive or purpose may be material to establish the scienter. In determining whether the statute has been wilfully violated, something more must be shown than a want of strict compliance with its terms. (See Black v. Ward, 27 Mich. 191; S.C., 15 Am. Rep. 162, note; L.R. 3 Q.B. 628.)
The present case is entirely destitute of any evidence which would warrant a finding of bad faith, or intention to deceive, or any fraudulent purpose whatever. The year previous (1874) the defendant had signed a report drawn in conformity to the statute, specifying that $12,000 of the stock had been issued for cash paid in, and $25,000 for property. The report for 1875, as originally drawn, stated "stock issued, $36,500." The words "stock issued" were erased by drawing a line through them, and the words "capital paid in" written over them. The words "stock issued" were in the handwriting of Mr. Leslie, the secretary. He testified that he could not tell whether the alteration was made before or after the signatures were made. That his reccollection was a blank as to that. The report was sworn to by Leslie before Mr. Kerr, a notary. He testified that the words "capital paid in" were in his handwriting; that Mr. Leslie brought the paper to him, and he could not recollect whether the signatures were on it at that time, but from an inspectiou of the paper he should say they were on it when it was brought to him; that witness remembered making some change in the paper. He is positive that he only saw the paper at the time it was verified, and he knows no one was present at that time besides Leslie.
The defendant testified that the paper was brought to his store and signed by him there; that to the best of his recollection, at the time he signed it, the words "stock issued" had not then been erased and "capital paid in" interlined; he recollected both reports, but did not recollect whether both were alike, and could not recollect the contents of either.
This is all the testimony on the subject of signing the report. The fact of its execution was admitted in the pleadings, and consequently was not disputed on the trial; but the testimony entirely fails to show any motive or purpose to misrepresent, or any guilty knowledge of the falsity, or rather inaccuracy, of the report. The evidence fails to show that the property purchased was over-valued, but, on the contrary, it shows that it was bargained for and a reduction in price obtained from $40,000 to $25,000, and the good faith of the transaction is not attempted to be impeached. The report seems to have been signed heedlessly and carelessly, but no willful misrepresentation was proven. The statute is highly penal. It subjects the offender to all the debts of the company contracted while he is a stockholder or officer, without regard to the amount of his stock and without any right of contribution such as is provided for in the case of an entire omission to make a report, and we think that it is intended to punish, not a mere act of negligence or ignorance, but only an intentional misrepresentation. It contemplates that erroneous reports may be made, but punishes only the officers who sign them, knowing them to be false.
On this ground the judgment should be reversed and a new trial ordered, costs to abide the event.
All concur.
Judgment reversed.