In Re Penniman , 11 R.I. 333 ( 1887 )

William Tweedle of Providence recovered judgment against the American Steam Gas Pipe Company, and on the execution against said corporation, for want of the goods and chattels of the corporation, or of said Penniman to be found by the officer in his precinct, the officer committed said Penniman to jail, he being, as alleged in said return, a stockholder of said corporation and liable for said debt, said corporation not having made the returns required by statute. Penniman was also committed on a similar execution against said corporation in favor of Charles S. Perham of Boston.

He was committed by virtue of the provisions of the act concerning manufacturing corporations, Gen. Stat. R.I. cap. 142, § 20, which provides that in certain cases, i.e. when the corporation does not make the return required by § 11 of the same chapter, the persons and property of the stockholders may be taken for a debt of the corporation, "on any writ of attachment or execution issued against the company for such debt, in the same manner as on writs and executions issued against them for their individual debts." Section 21 provides that instead of this proceeding the creditor may have his remedy against the stockholders by a bill in equity.

After Penniman's commitment to jail, and while he was in jail, the General Assembly of Rhode Island, on March 27, 1877, passed the following act: —

"CHAPTER 600. AN ACT DEFINING AND LIMITING THE MODE OF ENFORCING THE LIABILITY OF STOCKHOLDERS FOR THE DEBTS OF CORPORATIONS.

"It is enacted by the General Assembly as follows:

"SECTION 1. No person shall hereafter be imprisoned, or be continued in prison, nor shall the property of any such person be attached, upon an execution issued upon a judgment obtained. against a corporation of which such person is or was a stockholder.

"SEC. 2. All proceedings to enforce the liability of a stockholder for the debts of a corporation shall be either by suit in equity, conducted according to the practice and course of equity, or by an action of debt upon the judgment obtained against such corporation; and in any such suit or action such stockholder may contest the validity of the claim upon which the judgment against such corporation was obtained, upon any ground upon which such corporation could have contested the same in the action in which such judgment was recovered.

"SEC. 3. All acts and parts of acts inconsistent herewith are hereby repealed.

"SEC. 4. This act shall take effect from and after the date of the passage thereof."

And Penniman now applies for his release under this act.

His application is opposed on the ground that the new act, so far as it affects contracts made before its passage, is void under the provisions of the Constitutions of the United States and of this state as impairing the obligation of a contract.

If it merely concerned the Constitution of this state we should not need so extended an examination of authorities. But as it concerns the Constitution of the United States also, although the principles of decision should be the same, we are obliged to refer to the decisions of the United States courts.

Does the act in question impair the obligation of a contract? If so it is of course invalid.

The distinction between acts which undertake to repeal those portions of a charter which constitute a contract between the stockholders, or to vary the terms or construction of a contract, and acts which only affect the remedy provided by the laws in force when such contract was made, was very early taken.Sturges v. Crowninshield, 4 Wheat. 122, 152, 200; and it would seem from the unreported cases mentioned in Mr. Hunter's argument pp. 136, 137, that the distinction must have been made much earlier.

And in relation to acts which merely affected the remedy this serious difficulty arose. If a state legislature could abolish or take away the remedy, this would practically destroy the contract, although its moral obligation might still remain. And on the other hand, if the contracting party is entitled, as long as the contract continues, to the same remedy to enforce it which existed when the contract was made, we should have the strange spectacle for a country of equal and general laws, priding itself upon its freedom from special privileges, of different sets of laws in force at the same time for enforcing contracts of the same nature merely because such contracts had been made at different times.

Although generally contracts would soon expire, yet there are perpetual contracts, and there would be more of them, especially as regards real estate, if the law allowed the parties to retain all existing remedies. In the case of perpetual leases in fee we have one instance of what might be done. We should have parcels of land in the same neighborhood practically governed by very different laws.

In the case of the leases of the Rensselaer manor in New York a provision was incorporated in the contract which was for a perpetual lease in fee, giving the right of distress for rent and detailing the mode of distraint. The legislature abolished distress for rent. The courts in New York held that the legislature might take away any particular remedy, provided they left an efficient remedy, and the cases, so far as we are informed, were never carried further. Guild v. Rogers, 8 Barb. S.C. 502; VanRensselaer v. Snyder, 9 Barb. S.C. 302; and on appeal, 13 N.Y. 299; Conkey v. Hart, 14 N.Y. 22, 30.

So in the case of the old Rhode Island Bank charters. The old Providence Bank was chartered November, 1791, the Rhode Island Bank October, 1795, and these charters contained a provision that when a note fell due and was unpaid for ten days after demand, the bank might summarily attach property and hold it to answer the suit, and the legislature had not reserved in the charter nor by general law the right to alter or repeal the terms of the charter. This right to attach was a special privilege, ordinary persons having no right to attach property unless the defendant was absent from the state. Similar provisions were inserted in charters passed during the following twenty years. This was familiarly known as bank process. In February, 1818, it was given to all banks by general law and without requiring any previous demand. In June, 1836, it was repealed as to all subsequent debts, and it was provided that banks should collect their debts by ordinary process and not otherwise, yet no question was ever raised as to the right of the legislature to take away this peculiar process. See also acts of February, 1820, October, 1820, October, 1821, and the laws of 1822, and the act of January, 1823; also the report of Mr. Durfee of Tiverton, who was afterwards chief justice, made to the House of Representatives, February 25, 1820, and published in the Providence Gazette. There were similar laws in Virginia, Maryland, and other states; seeBank of Columbia v. Okely, 4 Wheat. 235, and Young v. TheBank of Alexandria, 4 Cranch, 384.

And cases of covenants for quiet enjoyment and for warranty in deeds would also furnish instances.

In the Middle Ages we have indeed the example of countries where different nationalities were intermingled each retaining its own laws. But they generally were cases of conquest, where the conquering race, while introducing its own laws for itself, permitted the conquered to retain their old laws for the regulation of all their private affairs and relations.

It became necessary for the courts to draw some line of distinction defining the powers of the state legislatures in such cases. This has been done, and it is best to state it in the language used by the judges of the United States Supreme Court, as with them the decision of all such questions, so far as concerns the United States Constitution, ultimately rests.

Says Judge Story, after remarking that an abolition of all remedies would be impairing the obligation of the contract: "But every change and modification of the remedy does not involve such a consequence. No one will doubt that the legislature may vary the nature and extent of remedies so always that some substantive remedy be in fact left. . . . . And a state legislature may discharge a party from imprisonment in a civil case of contract without infringing the Constitution; for this is but a modification of the remedy and does not impair the obligation of the contract." Story on Const. § 1385.

"Nor would a state law discharging a party from imprisonment under a judgment upon a contract, though passed subsequently to the imprisonment, be an unconstitutional exercise of power; for it would leave the obligation of the contract undisturbed. The states still possess the rightful authority to abolish imprisonment for debt, and may apply it to present as well as to future imprisonment." Story on Const. § 1398.

The doctrine of the latter part of the foregoing section is founded upon the decision of the United States Supreme Court, inMason v. Haile, 12 Wheat. 370, 378. "Can it be doubted but the legislatures of the states, so far as relates to their own process, have a right to abolish imprisonment for debt altogether, and that such law might extend to present as well as future imprisonment? We are not aware that such a power in the states has ever been questioned. And if such a general law would be valid under the Constitution of the United States, where is the prohibition to be found that denies to the State of Rhode Island the right of applying the same remedy to individual cases? This is a measure which must be regulated by the views of policy and expediency entertained by the state legislatures. Such laws act merely upon the remedy, and that in part only. They do not take away the entire remedy, but only so far as imprisonment forms a part of such remedy. The doctrine of this court in the case of Sturges v. Crowninshield, 4 Wheat. 122, 200, applies with full force to the present case. ``Confinement of the debtor may be a punishment for not performing his contract, or may be allowed as a means of inducing him to perform it. But the state may refuse to inflict this punishment, or may withhold this means and leave the contract in full force. Imprisonment is no part of the contract, and simply to release the prisoner does not impair its obligation.'"

And it is a noticeable fact that the case of Mason v.Haile, 12 Wheat. 370, grew out of the practice, formerly prevalent in Rhode Island, of passing special acts of the legislature for each particular case, granting release from imprisonment or complying with the terms of the old Insolvent Act of 1756, which had long been repealed as a general law. Haile was committed on the execution issued on the judgment against him, and had given bond for the liberty of the yard, as it was called,i.e. to remain within the statutory limits of the jail yard.¹ He had taken the poor debtors' oath, and was still detained on the limits by his creditors paying his jail board. In this stage of the case the legislature granted his petition for a discharge, and he was discharged. Suit was brought on his jail bond, on the ground that the legislature could not discharge him. His discharge was lawful if the legislative act was constitutional. And it is evident that the fact that the act was a special one was fully before the minds of the court. See, also,Beers et al. v. Haughton, 9 Pet. 329, 359; Gray, Sherwood Co. v. Munroe et als. 1 McLean, 528; Records of General Assembly R.I. February, 1816.

And Judge Cooley says (Constit. Limitations (3d ed.), 287: "It has accordingly been held, that laws changing remedies for the enforcement of legal contracts will be valid even though the new remedy be less convenient than the old, or less prompt and speedy."

The latter part of this paragraph is founded on the decision of the United States Supreme Court in Bronson v. Kinzie etals. 17 Pet. 28; 1 How. U.S. 311. Although it was not decisive of the case, yet it was necessarily considered, and has been over and over again so laid down in the text books, and seems consistent with other decisions.

The counsel for the creditors has referred us to this case,Bronson v. Kinzie et als., as showing a disposition on the part of the United States Supreme Court to retrace its steps.

The Legislature of Illinois had passed two acts, one giving a mortgagor whose land was sold under a decree in chancery a right to redeem; and another prohibiting a sale under such a decree unless for two thirds of an appraised value. The validity of these two acts was discussed by the court. Taney, C.J., delivered the opinion: "If the laws of the state had done nothing more than change the remedy upon contracts of this description, they would be liable to no constitutional objection. For, undoubtedly, a state may regulate at pleasure the modes of proceeding in its courts in relation to past contracts as well as future. It may, for example, shorten the period of time within which claims shall be barred by the statute of limitations.". . . . "And, although a new remedy may be deemed less convenient than the old one, and may, in some degree, render the recovery of debts more tardy and difficult, yet it will not follow that the law is unconstitutional. Whatever belongs merely to the remedy may be altered according to the will of the state, provided the alteration does not impair the obligation of the contract. But if that effect is produced it is immaterial whether it is done by acting on the remedy or directly on the contract itself." 1 How. U.S. 315, 316. And the court go on, p. 317, to explain their meaning, by saying that the obligation of the contract may be seriously impaired "by burdening the proceedings with new conditions and restrictions, so as to make the remedy hardly worth pursuing." The court held, p. 320, that the new law gave to the mortgagor an equitable estate in the land, which he did not have under the original contract of mortgage, and that the other act imposed conditions which would often render a sale impossible, and besides was confined to past contracts. These are the principles laid down by the court.

McLean, J., p. 322, dissented, on the ground that the question of constitutionality had not been argued, and its decision was not necessary in the case; he held to the broader ground as expressed in the opinion of Marshall, C.J., inSturges v. Crowninshield, 4 Wheat. 122, 200, that the remedy was no part of the contract; and argued strongly that any other doctrine would leave every case at the mere discretion of the court. Every contract, he contended, p. 330, was entered into with a supposed knowledge that the law making power could control the remedy.

And the decision in this case was subsequently referred to and approved in McCracken v. Hayward, 2 How. U.S. 608, 613.

The case of Hawthorne v. Calef, 2 Wall. 10, is instructive. The Legislature of Maine had provided in a charter that if no property of the corporation could be found, the property of the stockholders should be liable, and the execution against the corporation might be levied on the property of a stockholder in the same manner as if the execution was against him personally, or the creditor might have an action of the case against him.

The plaintiff sued the corporation, and, getting nothing, sued the defendant. The Legislature of Maine, a few months after the debt was contracted, repealed the individual liability clause of the charter.

The Supreme Court of that state sustained the act, on the ground that, as the charter did not make the stockholder personally liable, but only his property, it could not be called a contract within the meaning of the constitution of the United States.

The case came before the United States Supreme Court, in 1864, and the decision of the state court was reversed. Nelson, J., in delivering the opinion of the court, says, speaking of the charter remedy: "This remedy the repealing act has not merely modified to the prejudice of the creditor, but has altogether abolished, and thereby impaired the obligation of his contract with the company." 2 Wall. 23. The court holding, that the stockholders had virtually agreed to become security to the creditors for the debts of the corporation.

In Von Hoffman v. City of Quincy, 4 Wall. 535, 553, the court say: "The right to imprison for debt is not a part of the contract. It is regarded as penal rather than remedial. The states may abolish it whenever they think proper. Beers et al. v. Haughton, 9 Pet. 359; Ogden v. Saunders, 12 Wheat. 230;Mason v. Haile, 12 Wheat. 373; Sturges v. Crowninshield, 4 Wheat. 200. They may also exempt from sale under execution the necessary implements of agriculture, the tools of a mechanic, and articles of necessity in household furniture." "It is competent for the states to change the form of the remedy or to modify it otherwise as they may see fit, provided no substantial right secured by the contract is thereby impaired. No attempt has been made to fix definitely the line between alterations of the remedy, which are to be deemed legitimate, and those which under the form of modifying the remedy impair substantial rights. Every case must be determined upon its own circumstances. . . . . If these doctrines were res integrae the consistency and soundness of the reasoning which maintains a distinction between the contract and the remedy, or, to speak more accurately, between the remedy and the other parts of the contract, might, perhaps, well be doubted. 1 Kent Comm. 456; Sedgwick on Stat. Constit. Law, 652; Washington, J., dissenting, in Mason v. Haile, 12 Wheat. 379. But they rest in this court upon a foundation of authority too firm to be shaken, and they are supported by such an array of judicial names that it is hard for the mind not to feel constrained to believe they are correct. The doctrine upon the subject established by the latest adjudications of this court renders the distinction one rather of form than substance."

This is stating it almost as strongly as Judge Marshall had previously stated it in Sturges v. Crowninshield, 4 Wheat. 122, 200. "Without impairing the obligation of the contract, the remedy may certainly be modified as the wisdom of the nation may direct."

The United States Supreme Court, in the Planters' Bank v.Sharp et al. 6 How. U.S. 301, 327, observed that "one of the tests that a contract has been impaired is that its value has by legislation been diminished," and this remark is quoted in VonHoffman v. City of Quincy, 4 Wall. 535; and the court, p. 553, take occasion to explain and qualify it. "This," they say, "has reference to legislation which affects the contract directly, and not incidentally or only by consequence. The right to imprison the debtor is not a part of the contract. It is regarded as penal rather than remedial. The states may abolish it whenever they think proper."

We have quoted freely from the United States Supreme Court because it is by the rules they lay down for the construction of the United States Constitution and by the spirit of them that we must decide this case, and not by our own views of what the law ought to be.

Let us examine the present case in the light of those decisions.

It is very plain that the new act does not attempt to do any one of several things which have been heretofore held to invalidate such acts. It does not postpone payment of the debt nor impose any condition on it. It does not annul the judgment against the corporation or in any manner reopen it, or, as the respondents contend, grant a new trial so far as the corporation is concerned; nor does it authorize the corporation to make any new defence it could not have made before; or does it even authorize the stockholder to make any new defence; he can only make, and that for his own protection only, such defence as the corporation could have made; it merely protects him against the fraud or negligence of its officers. The distinction in regard to allowing new defences is well laid down by Judge Cooley. "If the new defence would defeat a contract previously valid, or take away any right assured to the party by it," then it would be in conflict with the Constitution of the United States. "But if the new defence only presents legal objections in some new way, or is designed only to make available an existing equity, the provision for it should be regarded as affecting the remedy only," and therefore admissible.

The counsel for the creditors has referred us to Pomeroy on Constitutional Law, which states the doctrine in favor of the creditor as strongly as it can be stated consistently with the decisions. He states as elements necessary to the efficacy and perfection of the remedy: 1st. The right to bring an action as soon as is permitted by the ordinary procedure; 2d. The right to obtain a judgment as soon as possible according to the ordinary modes of proceeding; 3d. "The right to enforce this judgment as soon and as efficiently as is allowed by the same general methods of practice." State laws interfering with these impair the obligation of the contract. "But the modes of judicial procedure have nothing in them intrinsically connected with the remedial right. . . . . They . . . . may be changed whenever new notions of policy become controlling, or an altered condition of society or of business requires another arrangement. Among these matters which belong to procedure are . . . . the forms of action and of pleading by which the claims and defences of parties shall be presented; the periods of time given in which to respond; . . . . the time within which judgment may be enforced, provided such period be fairly referable to that general convenience of courts and of suitors which lies at the basis of all established modes of practice, and be not a merely arbitrary delay which unnecessarily hinders the creditor. A change in these and such like matters does not affect the remedial right itself, and does not impair the obligation of even existing contracts." §§ 612, 613.

And in § 609 Pomeroy says the decisions of the United States Supreme Court have established and applied the rule, that materially altering or postponing the existing remedy, or imposing new conditions upon it, which substantially interfere with its present conditions, have the effect to impair the obligation of the contract.

It is difficult to see how the new act violates any of the conditions laid down in this treatise.

It does not in the least alter or diminish the liability either of the corporation or of the stockholder on the contract.

The counsel for the creditors have referred to Hawthorne v.Calef, 2 Wall. 10, as being like this case. We cannot perceive any similarity whatever. In that case the Legislature of Maine, after the debt was incurred, repealed the liability clause of the charter. And in the often cited case of Green v. Biddle, 8 Wheat. 1, all remedy was taken away. So also in Planters' Bank v. Sharp et al. 6 How. U.S. 301. So also in Gunn v. Barry, 15 Wall. 610, where the court say the remedy was not impaired but annihilated, and the lien acquired by judgment taken away.

What, then, does the new act of 1877 do? It abolishes the imprisonment; and if we can rely at all upon judicial language the United States Supreme Court have in many cases, and by various judges, decided that this may be done; and that it may even be applied to existing cases; and in the case of Mason v. Haile, that it may be done by special act, after the debtor had, as in this case, been committed on execution.

Upon the constitutionality of state insolvent laws, so far as they undertake to release future acquired property from liability for past debts, there has been at times great conflict of opinion among the judges, and so too as to their effect upon contracts subsequently made, and as to the place of contract. But upon the point now before us, the right to liberate the body from imprisonment, there has never been, so far as we are aware, any difference of opinion. See also Planters' Bank v. Sharp etal. 6 How. U.S. 301, 328.

The new act further provides that the debtor's property shall not be attached on the execution against the corporation.

The former law contained a provision that the execution against the corporation, even if the corporation had a valid defence which either fraudulently or negligently it had not made, might be levied on the stockholders' property without any notice to him or hearing whatever. Whether this could be constitutionally done or not is not now the question. It is attempted to be justified on the ground that when a person becomes a stockholder he consents to it. See Hawthorne v.Calef, 2 Wall. 10, 22. The court observes that he virtually agrees to become security for the debts, and quotes Chancellor Jones in Corning v. McCullough, 1 N.Y. 47, 49, as holding that he becomes concurrently liable. But it would be considered a strange proceeding to give a creditor a right, on getting judgment against one man to levy his execution on the property of a surety or joint promisor, without notice to the latter or opportunity to dispute the claim.

In the Bank of Columbia v. Okely, 4 Wheat. 235, the bank had a right by its charter to attach the property of its debtors on original process against any person indebted to the bank on bills or notes expressly made negotiable at said bank.

On a motion to quash the execution as being against constitutional right, it was argued that the debtors by signing the note had consented to the jurisdiction and process. The court rejected the motion, mainly, as it would seem, on the ground that a trial by jury was secured to the debtor by the act. But they go on to say that they would ponder long before they would sustain this action, if they could be persuaded that the act in question produced a total prostration of the trial by jury, or even involved the defendant in circumstances which rendered that right unavailing for his protection.

In this case the debtor had by his signature admitted the debt. And, furthermore, his right to trial by jury was saved to him.

Allowing that one person may give to another a power to confess judgment against him for a definite or ascertainable sum, it would not follow that he might waive permanently his right to a trial by jury and other constitutional privileges.

The question would somewhat resemble the one sometimes agitated of the right of a man to sell himself into perpetual slavery.

Some judges, Conant v. Van Schaick, 24 Barb. S.C. 87, and cases there cited, have compared the liability here imposed to that of partners. An ordinary charter gives all the advantages of partnership, with the additional advantages of an immunity from private liability. And they argue that the old law in this case operated merely to take away the immunity; and that the stockholder by becoming such has consented to it. But it is believed that the records of courts will be searched in vain for a case where, upon a judgment against partners, the law has allowed the execution to be levied on the separate property of one who had no notice of the suit. Fictions have generally been invented by the courts to subserve the purposes of justice. Not so here.

Although no question of the constitutionality of the old law is raised here, these considerations are important as showing the superior equity of the new law over the old one.

A person may authorize an agent to make a bargain, and be bound by the authority he has given. But he certainly ought not to be deprived of the right to a trial by jury upon the question whether any legal contract was ever made by his agent.

It is argued that the corporation was trusted on the ground of this liability; true, perhaps, but not on the ground of the particular mode in which that liability is to be enforced, and more especially if one equally available is provided.

The remedy by bill in equity, the most just of all because it would compel all to pay in proportion, might be tedious, but not necessarily so; and if delay attends it, it can be no serious ground of objection to the new act, for the old act also provided the same remedy.

In place of the power to levy without notice or service of any kind upon private property, the new act substitutes an action of the case; and the sole privilege granted by the new act, which is not contained in the old one, is, that if the corporation had any valid defence to the action, the stockholder may set it up to the same extent the corporation might have done.

And while it repeals the provision by which his property could be levied upon on the execution against the corporation, without notice to him or opportunity for defence, it leaves his property entirely open to attachment, and his person to arrest, in the new action which it gives against him personally, and interposes no delay other than necessarily attends all litigation.

Under our laws the creditor gains no lien by his judgment; but if in the present case he claimed to have a lien by levy of execution on property, and the legislature had then undertaken to repeal the old remedy and divest the lien so claimed, the question would have been different from the one before us. SeeGunn v. Barry, 15 Wall. 610, 622.

The petition must therefore be granted, and the dischargeordered.

NOTE BY MR. JUSTICE POTTER. — The very able argument of Hon. William Hunter, in the case of Sturges v. Crowninshield, 4 Wheat. 122, 135, is well worth reading on this question. He gives a history of the English laws for imprisonment for debt, and also an account of several unreported cases involving this question decided on circuit by Ellsworth, C.J., Jay, C.J., and others, many of them in Rhode Island. He mentions a tradition ascribing the introduction of this phrase into the Constitution to Judge Wilson; but it seems now that it was introduced on motion of Rufus King, and was taken from the Ordinance concerning the Northwestern Territory. See Curtis's Hist. of the Constitution, vol. 2, 365; Elliot's Debates, vol. 5, 484; Madison Papers, Gilpin's ed. vol. 3, 1443, 1552. It seems strange that it was so slightly noticed in the Federalist. See Nos. 32 and 34. See also Judge Tucker's edition of Blackstone, vol. 1, part 1, appendix, p. 311.

Mr. Hunter is still recollected by the older members of the bar as one of the most learned and eloquent advocates that ever adorned the profession. He was for some time Senator in Congress, and United States Minister to Brazil.

For various definitions of obligation and contract, see Gooley's Const. Limit. 3d ed. p. 285; Reid's Essays on the Active Powers, Essay 5, ch. 6, p. 445.

¹ See Public Laws R.I., Digest of 1822, p. 419, for the definition of these limits at that time. They were enlarged in 1830, and are now the limits of the county.