Opinion
Decided January 25th, 1940.
1. R.S. 14:8-10, formerly part of section 48 of the Corporation act ( Comp. Stat. p. 1630), was enacted for the benefit of creditors to secure them for their debts as against the dissipation of corporate funds through loans to stockholders by officers. The right of action is not limited solely to creditors, and in this case it also resided in the corporation itself for the benefit of its creditors, as well as in the trustees appointed in reorganization proceedings.
2. Investment Co., in which the defendants were officers at the time of the loans in question, gave a mortgage on certain premises to Prudence Co. to secure its bond. The bond and mortgage were thereafter assigned to Trust Co. as trustee under a depository agreement. Prudence Bond Corp. issued participation certificates guaranteed by Prudence Co. Investment Co. filed its petition for reorganization under section 77B of the Bankruptcy act. Trustees in bankruptcy were appointed; a plan of reorganization was presented, accepted by all classes of claimants, approved by the district court and put into action. Under this plan, Journal Square Co. was organized as successor to Investment Co., and the trustees conveyed and assigned all the assets of Investment Co. to the new corporation, including the mortgaged premises. By a later assignment, the trustees assigned all choses in action which they or Investment Co. might have against the officers of the company and against its former officers. Unsecured creditors of the bankrupt company surrendered their claims and accepted notes of Journal Square Co. in their place. The bond and mortgage were assigned to complainant Hudson Bank as trustee under a declaration of trust in favor of all holders of the participation certificates; they assigned their interest in the bond and mortgage, whose payment Journal Square Co. assumed, and accepted new certificates issued by Hudson Bank. For arrearages of interest due on their old certificates, they received Class A stock of Journal Square Co. in proportion to their certificate holdings. Stockholders of Investment Co. received stock of Journal Square Co. Complainant Cole assented to the reorganization plan, surrendered her mortgage participation certificate, and received a new certificate issued by Hudson Bank and also fourteen shares of Journal Square Co. Class A stock. Held, by taking over the assets of Investment Co., giving its promissory notes to the latter's unsecured creditors and assuming the mortgage debt, Journal Square Co. not only succeeded to the rights of Investment Co. creditors, but the trustees assigned to it the right of action they and the bankrupt company had against the defendants. Although the unsecured creditors and holders of mortgage participation certificates surrendered their rights against Investment Co., the surrender did not include their rights as against defendants to have an asset of Investment Co. recovered for their benefit. Journal Square Co. has a right to prosecute this action, and so much of the funds unlawfully dissipated by defendants as it may recover may be applied by it in payment of its promissory notes held by creditors of the bankrupt company and in payment of interest and principal on the mortgage debt.
3. Complainant Cole, who was owner of an original participation certificate and as such a creditor of Investment Co., and Hudson Bank, assignee of the bond and mortgage executed by Investment Co. and trustee under a declaration of trust in favor of the original mortgage participation certificate holders who had assigned their claims to it, are proper, if not necessary parties, to this action.
4. R.S. 14:7-8 provides that when officers of any corporation shall be liable to pay the debts of the corporation, any person to whom they are liable may have an action against them and may have his remedy by bill in chancery. The defendants' contention that the statute is unconstitutional in that it attempts to confer on the court of chancery jurisdiction to hear and determine actions for debt, is unsound.
5. A court of equity is a proper tribunal in which to determine the liability of trustees charged with fraudulent conduct, and wherein there can be a marshalling of assets and liabilities requisite to ascertainment of how much of the sums loaned will be required for payment of debts.
6. Statutes of limitation do not apply in terms to courts of equity, but the spirit and meaning of such statutes are generally applied in equity unless circumstances appear which would make it inequitable to do so.
7. A suitor cannot be deprived of his remedy in equity on the ground of laches unless it appears that he had knowledge of his rights and neglected prompt prosecution of his remedy. It does not appear that complainants, or the trustees in bankruptcy, knew of the illegal loans until some time after proceedings in bankruptcy had been instituted. The bill herein was filed in January, 1938, and it is not at all certain that complainants knew the extent or details of the loans until the records of the bankrupt company came into the hands of Journal Square Co., in April, 1937. The assignment to the latter company of choses in action against the officers of the bankrupt company was not made until October, 1937.
8. Section 48 of the Corporation act is a remedial and not a penal statute; it is authority for an action for damages for breach of fiduciary duty. Section 21 of the statute of limitations ( R.S. 2:24-22b) is not applicable.
9. The liability which complainants seek to fasten on defendants is not one for a simple debt, but for a special sort of obligation created by a special statute, and it is therefore for a debt on a specialty, to which section 1 of the statute of limitations ( R.S. 2:24-1) does not apply. It should be noted that R.S. 14:8-10 provides that liability of the officers shall continue "until the repayment of the sums so loaned."
10. Under the statute ( R.S. 14:8-10) all officers who assent to loans made to stockholders are liable therefor. Under the evidence it must be concluded that all the defendants knew of and assented to the loans in question, and are liable jointly and severally for the balance remaining due thereon, with interest from the dates the loans were made.
On appeal from a decree of the court of chancery advised by Vice-Chancellor Fielder, who filed the following opinion:
"The original complainants herein were Elizabeth Cole and Twenty-six Journal Square Corp. (hereinafter referred to as Journal Square Co.). Subsequently Hudson County National Bank as trustee (hereinafter referred to as Hudson Bank) was added as a complainant. The complainants seek to recover from defendants Brandle, Cochrane, Larkin, Fallon and Buckley the amount of loans of corporate funds of Union Labor Investment Corp. (hereinafter referred to as Investment Co.) made to stockholders of that corporation by or with the assent of defendants, during a period from 1927 to 1933, while defendants were officers of Investment Co. Complainants charge defendants with liability under R.S. 14:8-10 which provides:
"`No corporation shall loan money to a stockholder or officer thereof. If any such loan be made the officers who make it, or assent thereto, shall be jointly and severally liable, to the extent of such loan and interest, for all the debts of the corporation until the repayment of the sum so loaned.'
"At the time the loans were made, the quoted statute was part of section 48 of our Corporation act ( Comp. Stat. p. 1630) and it has been held that the statute was enacted for the benefit of creditors to secure them for their debts as against the dissipation of corporate funds through loans to stockholders by officers. Rubinstein v. Kasprzak, 96 N.J. Eq. 406. Defendants contend that complainants have no standing as creditors or otherwise to maintain this suit, because of bankruptcy proceedings taken for reorganization of Investment Co. and it is therefore necessary to state those proceedings in brief.
"The principal asset owned by Investment Co. was the land and building known as 26 Journal Square, Jersey City, on which the corporation had given its mortgage to secure its bond for $750,000 to Prudence Co., which bond and mortgage were thereafter assigned to Trust Company of New Jersey as trustee under a depository agreement, and against which Prudence Bond Corp. issued participation certificates guaranteed by Prudence Co. One of those certificates for $1,000 was purchased by complainant Cole.
"In August, 1934, Investment Co. was in financial distress and filed its petition in United States district court for the district of New Jersey, for reorganization under section 77B of the Bankruptcy act. At that time its bond and mortgage were in default because of large arrears of interest thereon and it was indebted to twenty or more unsecured creditors who proved their claims in the bankruptcy proceedings for upward of $40,000, and Prudence Bond Co. had defaulted in interest on its mortgage participation certificates. Trustees in bankruptcy were appointed who administered the affairs of Investment Co. to March 8th, 1937, when a plan of reorganization, accepted by all classes of claimants against Investment Co., was approved by said district court and was put into effect.
"Under the reorganization plan Journal Square Co. was organized as successor to Investment Co. and the trustees in bankruptcy, in or about April, 1937, conveyed and assigned to the new corporation all the assets of Investment Co., including the mortgaged premises. By another assignment dated October 18th, 1937, made under order of said court, the trustees in bankruptcy expressly assigned to Journal Square Co. all choses in action which Investment Co. or the trustees might have against the officers of Investment Co. and against its former officers. Unsecured creditors of Investment Co. surrendered their claims against that corporation and accepted promissory notes of Journal Square Co. for their respective claims, payable in 1942 without interest. The bond and mortgage were assigned to Hudson Bank as trustee under a declaration of trust in favor of all holders of Prudence Bond Co. participation certificates, and payment of the mortgage was extended to 1942 at a reduced interest rate. Journal Square Co. assumed payment of the mortgage and covenanted to pay the amount due thereon. The mortgage participation certificate holders assigned to Hudson Bank, trustee, their interest in the bond and mortgage and accepted new certificates issued by Hudson Bank, and for arrears of interest due on their old certificates the holders thereof received class A stock of Journal Square Co. at a proportionate rate of the amount of their certificates. Stockholders of Investment Co. received non-voting stock of Journal Square Co. Complainant Cole assented to the reorganization plan and surrendered her mortgage participation certificate and accepted a new certificate issued by Hudson Bank and she also received fourteen shares of Journal Square Co. class A stock.
"The quoted statute does not limit the right of action solely to creditors for recovery of corporate funds unlawfully loaned to stockholders. Since recovery under the statute would be for the benefit of all creditors, a right of action also resided in Investment Co. itself for the benefit of its creditors and the trustees in bankruptcy might have prosecuted such an action. Whitfield v. Kern, 122 N.J. Eq. 332. When Journal Square Co. took over the assets of Investment Co. and gave its promissory notes to the latter's unsecured creditors and assumed the mortgage debt, it not only succeeded to the rights of Investment Co. creditors, but said trustees expressly assigned to Journal Square Co. the right of action they and Investment Co. had against the defendants. Although the unsecured creditors and holders of mortgage participation certificates, in form, surrendered their rights against Investment Co. such surrender did not include their rights as against defendants, to have an asset of Investment Co. recovered for their benefit. They still have a vital interest in recovering from defendants so much of Investment Co.'s funds as defendants unlawfully dissipated, so that such funds may be applied by Journal Square Co. in payment of its promissory notes held by Investment Co. creditors and in payment of interest and principal on the mortgage debt. I do not doubt that Journal Square Co. has a standing to prosecute this action.
"Miss Cole and Hudson Bank, trustee, seem to have been joined as complainants out of abundant caution. They can be said to be proper, if not necessary parties. The participation certificate Miss Cole held, by its terms, assigned to her a portion of the mortgage debt against which the certificate was issued, and to that extent she was a creditor of Investment Co. and entitled to share in its general assets after the mortgage security had been exhausted and found insufficient to satisfy claims of certificate holders. That debt was due when Investment Co. instituted its bankruptcy proceedings, because the mortgage was then in default and Miss Cole stood as a contingent creditor of Investment Co. and proved her claim as such. It is true she subsequently surrendered her certificate and took a new certificate issued by Hudson Bank, but her interest in seeing that defendants account for their wrongful acts survived, because so much money as can be recovered from them can be applied by Journal Square Co. in discharging its obligations on promissory notes, in keeping up interest on the mortgage which is the present security for Miss Cole's certificate and will contribute toward increasing Journal Square Co.'s assets above its liabilities, to her advantage as an owner of that corporation's class A stock. Hudson Bank joined as a party complainant, under an order permitting it to intervene, apparently on the theory that because it is assignee of the bond and mortgage executed by Investment Co. and also because the mortgage participation certificate holders had assigned their claims to it and it had executed a declaration of trust in their favor, it might be said to be a necessary party as representative of the rights of those creditors and as a creditor in its own right.
"Defendants urge that this suit should be dismissed on the ground that complainants have an adequate remedy at law for recovery against defendants, since the bill charges a definite amount of loans made by particular defendants. By statute ( Comp. Stat. p. 1655 § 92; R.S. 14:7-8) it is provided that when the officers of any corporation shall be liable to pay debts of the corporation, any person to whom they are liable may have an action against them and may have his remedy by bill in chancery. Defendants contend that the statute is unconstitutional in that it attempts to confer on this court jurisdiction to hear and determine actions for debt. The statute was enacted in 1896 and has remained on the statute books more than forty years, apparently unquestioned as to its constitutionality and therefore I would be unwilling to disregard its provisions; however, I do not agree with defendants' contention. Ever since Wetherbee v. Baker, 35 N.J. Eq. 501, bills have been filed in this court and (so far as I read the reported decisions) never attacked on the ground now urged, to recover debts due from stockholders on unpaid subscriptions to capital stock, being claims no different in their nature from the claim complainants urge here. Here, defendants as officers of Investment Co., were trustees of corporate assets and as such were bound to administer such trust faithfully for the benefit of creditors as well as stockholders and they are charged with having been unfaithful to their trust in that they misapplied such assets willfully, in fraud of creditors. While the bill does charge a definite amount loaned to stockholders, defendants are only liable under the statute ( R.S. 14:8-10) to the extent the amount of such loans remained unpaid and the assets of the corporation were insufficient to satisfy corporate debts. To determine the extent of defendants' liability it is necessary to ascertain what repayments, if any, have been made on the sums originally loaned and what debts the corporation owed, and such an inquiry is within the scope of the prayers of the bill which call for an accounting. A court of equity is a proper tribunal in which to determine the liability of trustees charged with fraudulent conduct, and wherein there can be a marshalling of assets and liabilities requisite to ascertainment of how much of the sums loaned will be required for payment of debts.
"Finally, defendants contend that complainants' action is barred by statutes of limitation or by laches. Statutes of limitation do not apply in terms to courts of equity but the spirit and meaning of such statutes are generally applied in equity unless circumstances appear which would make it inequitable to do so ( Depew v. Colton, 60 N.J. Eq. 454; Patrick v. Groves, 115 N.J. Eq. 208 ) and a suitor cannot be deprived of his remedy in equity on the ground of laches unless it appears that he had knowledge of his rights and neglected prompt prosecution of his remedy. Hall v. Otterson, 52 N.J. Eq. 522; affirmed, 53 N.J. Eq. 695; Hinners v. Banville, 114 N.J. Eq. 348.
"Defendants contend that the liability imposed by section 48 of the Corporation act for making prohibited loans is a penalty and therefore action for recovery is barred after the lapse of two years by section 21 of the statute of limitations ( Comp. Stat. p. 3170; R.S. 2:24-22b), or, if complainants' claim is not for a penalty, it is for a debt for the recovery of which action is barred after the lapse of six years by section 1 of said statute. Comp. Stat. p. 3162; R.S. 2:24-1. I am of the opinion that neither section of the statute of limitations applies. I regard said section 48 as a remedial and not a penal statute; it is authority for an action for damages for breach of a fiduciary duty. Stated generally, it is not unlawful for corporate officers to make loans of corporate funds, but by statute the legislature has forbidden such loans to be made to stockholders and has said that disregard of such prohibition will expose the officers making or assenting to such loans, to a civil liability for such portion of the loans as may be found necessary to protect creditors. In other words, the statute requires corporate officers to replace funds they loan wrongfully, to the extent necessary to repair the damage resulting from their wrongful acts ( Appleton v. American Malting Co., 65 N.J. Eq. 375; Shelton Electric Co. v. Victor Talking Machine Co., 277 Fed. Rep. 433), so that section 21 of the statute of limitations is not applicable. Neither is liability sought to be fastened on defendants for a simple debt, but for a special sort of obligation created by a special statute and it is therefore for a debt on a specialty, to which section 1 of said statute does not apply ( Cowenhoven v. Freeholders of Middlesex County, 44 N.J. Law 232; Smith v. Jersey City, 52 N.J. Law 184; Warren County v. Harden, 95 N.J. Law 122) and it is to be noted that section 48 of the Corporation act provides that liability of the officers shall continue `until the repayment of the sum so loaned.'
"Nor are complainants to be charged with laches prejudicial to defendants. It does not appear that complainants, or the trustees in bankruptcy, knew of the illegal loans until some time after proceedings in bankruptcy had been instituted. It is not at all certain that complainants knew the extent or details of the loans until the records of Investment Co. came to the hands of Journal Square Co. in April, 1937, and the express assignment to Journal Square Co. of choses in action against officers of Investment Co. was not made until October, 1937, and the bill of complaint herein was filed January 10th, 1938.
"The first loan to a stockholder was made November 1st, 1927, and thereafter such loans were made from time to time to October 27th, 1933, the number of borrowing stockholders being fifty-nine. In each case the loans were made by check of Investment Co. and the borrowers signed promissory notes and deposited their shares of stock as collateral. Signatures of two officers were required on all corporation checks and a total of sixty-nine checks were issued for said loans, of which defendant Cochrane as assistant treasurer signed all sixty-nine; defendant Brandle as president signed fifty-three; defendant Larkin as secretary signed fifteen; defendant Buckley as a vice-president signed one. Defendant Fallon, who was also a vice-president, signed none. The principal amount of such loans remaining unpaid is $34,250, including loans made to borrowers Schenker, Reynolds, Squire and International Brotherhood of Boilermakers to whom loans were made on Investment Co. stock, and who I consider were stockholders of that corporation although defendants contend they were not. Each defendant who signed an Investment Co. check for one or more of the loans certainly participated in making the loan evidenced by the check or checks he signed, but defendants contend they should not be held liable for any amount in excess of checks signed by them and defendant Fallon contends he should not be held liable in any amount because he did not sign any check. Under the statute, however, officers are liable who assent to such loans. All defendants (except Cochrane) were directors of Investment Co. for the entire period covered by the loans. It does not seem possible that as directors and officers of the corporation they were unaware of the general practice of making corporate loans to stockholders and did not know that such loans were being made to such borrowers over a long period of years and did not assent thereto. No defendant testified to such lack of knowledge, or that he had objected or dissented to the general practice — in fact Cochrane was the only defendant who testified for defendants and he was not questioned on the point. The minutes of directors' meetings for the period covered by the loans show that at various meetings treasurer's reports, balance sheets, financial statements and audits were presented showing corporate loans receivable and because of those reports and statements and the knowledge of corporate transactions with which directors of a corporation are chargeable, I conclude that all defendants knew of and assented to all such loans and are liable jointly and severally for the balance of $34,250 principal remaining due thereon, with interest from the dates the loans were made."
Mr. Abner W. Feinberg and Messrs. Hershenstein, O'Brien Tartalsky, for the appellants.
Messrs. Wall, Haight, Carey Hartpence, for the respondents.
The decree appealed from will be affirmed, for the reasons expressed in the opinion filed by Vice-Chancellor Fielder in the court of chancery.
For affirmance — THE CHIEF-JUSTICE, TRENCHARD, CASE, BODINE, PERSKIE, PORTER, HETFIELD, DEAR, WELLS, WOLFSKEIL, HAGUE, JJ. 11.
For reversal — DONGES, HEHER, RAFFERTY, JJ. 3.