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APPEAL from the Superior Court of Cook County; the Ilon. Gwynn GARNETT, Judge, presiding.
Messrs. F. J. Smith & II ELMER, for appellant.
Mr. E. A. Oris, for appellee.
Gary, J. The parties to this suit entered into a partnership on the 1st of November, 1881, under an agreeinent as follows:
“CHICAGO, ILL., November 1, 1881. “The undersigned, Geo. M. Hord and Joseph Gregg, have this day formed a copartnership for the transaction of a legitimate commission business, based on caslı orders. Geo. M. Hord to furnish the capital required and to pay all office and clerical expenses and stationery bills. Profits and losses to be equally divided, after paying cost of telegrams and other expenses incidental to the cash business. This partnership to last for five years, unless sooner dissolved by mutual consent or by death of one of the contracting parties. Joseph Gregg to give his entire time and attention to the business. As a protection to Geo. M. Hord against losses, Joseph Gregg shall each year leave undrawn one thousand dollars of his share of the profits, which shall accumulate as additional capital until the termination of this contract, when the amount shail be paid over to Joseph Gregg.
(Signed) “Geo. M. HORD,
JOSEPH GREGG." This partnership continued until the 1st of May, 1886, when it was terminated by the withdrawal of the appellant. On the 31 of May, 1886, the appellee made a demand upon the appellant for $2,100 on account, upon a brief statement then rendered of the accounts between them, and on the 21st of the same month this bill was filed by the appellant for an account of the partnership affairs.
That accounting resulted in a decree against appellant for $2,639.31, froin which this appeal was taken. The original claims of the respective parties have been so narrowed by
Gregg v. Hord.
themselves that the only questions now awaiting decision aro upon the allowance in the Superior Court, as partnership expenses, of $1,094.05 for clerical expenses, $150.06 for interest paid, and $150.10 for office expenses, such as towels, stationery, etc. As to these last two sums the only evidence whether they are correct or incorrect is pencil memoranda taken by the appellant, as Tie says, from the books, and his statement that they are wrongly charged. The many small items which make up these two sums were entered from time to time, through the whole course of the business, in books which the appellant frequently examined, but he now says that he did not know that such items were so entered. The appellee says he never knew anything about them.
The argument is that, as by the original agreement the appellee was to furnish the capital and pay the office expenses, those items are necessarily wrong. The sufficient reply is that the business actually conducted by the partnership was not restricted to that for which it was created, but extended to such as required a greater use of money, which accounts for the interest; and the ambiguity of the agreement as to * expenses incidental to cash business,” puts the burden upon appellant of showing clearly how it is that, after he has so long acquiesced, the items making up the $150.10 are wrong; $1.50 is for towels, which are probably no more incidental to a cash business than to any other done with clean hands, but the residue of the items, in their nomenclature, do not indicate whether they were peculiarly incidental to the business of the partnership or not. As to the $4,095.05 for clerical expenses, there is very satisfactory proof, supported by the book-keeping, that the parties, for the convenience of the appellant and at his request, employed a stenographer in addition to the clerical force originally intended, upon his undertaking to bear the additional expense.
Judge Garnett, having tried this case in the Superior Court, takes no part in this decision. The decree is affirmed.
Limitations-Corporations-Indebtedness in Excess of Capital StockLiability of Directors and Officers.
1. The statutory liability of directors and officers of any corporation, who assent to the creation of an indebtedness in excess of the capital stock of such corporation, is not a penalty. A bill to enforce such liability is not, therefore, within the limitation of two years.
2. The statute of limitations begins to run as to such liability when the excess of indebtedness is created with assent of the persons to be charged, without regard to the time of its miturity as against the corporation,
[Opinion filed January 16, 1889.]
APPEAL from the Superior Court of Cook County; the Hon. HENRY M. SHEPARD, Judge, presiding.
Mr. Consider H. WILLETT, for appellants.
If the liability created by the statute is not in the nature of a contract, but a penalty, it is barred in two years.
“Penal statute: a statute which forbids an act and pun. ishes the doing or commission of it.” Burrill's Dictionary.
“A penal statute is one which imposes a forfeiture or penalty for transgressing its provisions or for doing a thing prohibited.” Potter's Dwarris on Stat. and Cons. 74.
“If a statute inflicts a penalty for doing an act, the penalty iniplies a prohibition, and the thing is unlawful, though there be no prohibitory words in the statute.” 1 Kent's Com., 407.
“When a penalty is imposed for doing or omitting an act the act or omission is thereby prohibited and made unlawful.” Endlich on the Interpretation of Statutes, Sec. 450.
“A statute would not inflict a penalty on what was lawful; consequently when the thing in respect of which the penalty is imposed is a contract, it is illegal and void." Ib.
For an argument showing the distinction between penalties and statutory liabilities we refer to Neal v. Briggs, 12 Ga. 104.
Wolverton v. Taylor.
In the light of these authorities the words of the section to be construed do not create a penalty. There is no express or implied prohibition that it is unlawful for the corporation to become indebted in excess of the capital stock. It is evident that a corporation to trade in paper with a capital stock of $50,000, fully paid, might find it a proper business venture to buy $100,000 worth of goods, paying part cash and obtaining the balance on time. Such an act is the ordinary business act of individuals, of partnerships and of corporations.
Becoming indebted in excess of the capital stock is a corporate act or debt. If a partnership becomes indebted in excess of the partnership funds it is a partnership debt. The partnership assets being insufficient to pay the partnership debts, the individual property of the persons comprising such partnership may be taken to satisfy such demands.
Debts in excess of the capital stock are valid corporate debts. By virtue of the statute, corporate debts beyond the amount of the capital stock have, to secure their payment, not only the corporation assets, but the personal and individual” liability of “the directors and officers of such corporations assenting thereto.”
This liability springs from the statute. It is primarily imposed by the statute. It is a contract the liability of which is measured by the very words of the statute.
In Illinois, whenever Sec. 16 has been construed, it has been held that the rights and the liabilities imposed could not be enforced at law. Low v. Buchanan, 94 Ill. 76; affirming Buchanan v. Low, 3 Ill. App. 202; Buchanan v. Barton Iron Co., 3 Ill. App. 191.
The only remedy to enforce the rights under Sec. 16 being in equity, the statute creates a statutory liability and not a penalty. If the statute created a penalty, an action of law would be the only mode of carrying it into effect.
A judgment against the corporation is not necessary to enforce the liability. Merchants Bank v. Stevenson, 5 Allen, 308; Queenan v. Palmer, 117 Ill. 619.
The liability is a creature of the statute. The nature of the liability is ex contractu only because the statute has made
The suit is to enforce a liability grounded upon the language of the statute. Terry v. Little, 101 U. S. 216.
Cases where similar language has been held to create an obligation ex contractu and not a penalty: Norris v. Wrenschall, 34 Md. 492; Sleeper v. Goodwin, 67 Wis. 577.
Equity is the appropriate remedy to enforce a statutory liability of stockholders. Harper v. Union Manf. Co., 100 III. 225; Eames v. Doris, 102 Ill. 350; Thompson v. Meisser, 108 Ill. 359; Tunesma v. Schuttler, 114 III. 156; Merchants Bank v. Stevenson, 10 Gray, 232 (directors); Pollard v. Bailey, 87 U. S., 20 Wall. 520; Cook on Stockholders, Sec. 226; cases cited.
The liability is primary, because it is not prohibited by the statute, but created by it. It is in fact a primary statutory liability, and not a penalty. Queenan v. Palmer, 117 111. 627; Fuller v. Ledden, 87 III. 310; Allen v. Sewell, 2 Wend: 327 ; Todhunter v. Randall, 29 Ind. 275; Young v. Rosenbaum, 39 Cal. 646; Perkins v. Sanders, 56 Miss. 733; Flaslı v. Conn., 16 Fla. 428; Flash v. Conn., 109 U. S. 371.
Messrs. EDWARD F. GORTON and EDWARD W. RUSSELL, for appellees.
A statute imposing a liability on directors for creating an excess of indebtedness over capital stock is a penal one. Sturges v. Burton, 8 Ohio St. 215; Bank v. Price, 33 Md. 487; Kritzer v. Woodson, 19 Mo. 327; Irvine v. McKeon, 23 Cal. 427.
Statutes are penal which impose a duty on directors to perform or which forbid the doing of certain acts contrary to public policy, and subject the director violating to pecuniary loss.
Liability for corporate debts for sailing to make required reports is penal. Merchants' Bank v. Bliss, 35 N. Y. 416; Halscy v. McLean, 12 Allen, 438; Derrickson v. Smith, 3 Dutcher (27 N. J.) 170; Gregory v. German Bank, 3 Colo 332; Miller v. White, 50 N. Y. 137; Shaler Hall Co. v. Bliss, 3 Barb. 309; Duckworth v. Roach, 8 Daly 159; Breitung v. Lindaner, 37 Mich. 217; Steam Engine Co. v. Hubbard, 101 U. S. 192. For making false certificate that capital stock is