Hill, Keiser & Co. v. Stetler

Opinion,

Mr. Justice Williams:

The defendants are sued as partners. They claim the immunity from liability as individuals which the act of 1874 confers on persons associating themselves in a joint stock or limited partnership association, alleging that they have fully complied with its provisions. This is the question on which the plaintiffs’ right to recover depends. The court below held that the organization of the Amity Coal Company, Limited, had been in full compliance with the provisions of the statute, and that the only remedy of the plaintiffs was by action against the association and then against the stockholders severally for the amount unpaid upon their stock subscriptions. A compulsory nonsuit was accordingly entered against the plaintiffs which the court declined to take off, and this action of the court is the error assigned.

The act of 1874 provides that when persons “ desire to form a partnership association for the purpose of conducting any lawful business.....by subscribing and contributing capital thereto, which capital shall alone be liable for the debts of such association,” they shall make and subscribe to a statement in writing, in which they shall set forth among other things the full names of the persons so associating themselves together ; “ the amount of capital stock of said association subscribed by each; the total amount of capital and when and how to be paid.” In § 2 it is provided, that the members of the association shall not be individually liable for any debt of the association until the joint property has first been exhausted, and then only to the extent to which they may be indebted upon their subscriptions to the capital stock. To the end that the subscribers may be protected and their liability kept within the prescribed limits, no execution can issue against them until an order has been made by the court in which the judgment is entered, or a law judge thereof, on notice to the person to be affected, and after full hearing, fixing the amount due upon his subscription and awarding the writ. In order that this question may be disposed of correctly, the act requires every such association to keep a “subscription list book” that may be produced in court, and that shall be “open to inspection by the creditors and members of the association at all reasonable times.”

The Amity Coal Company, Limited, was organized by three persons, viz.: Stetler, Fuller, and Archbald, who subscribed and acknowledged the statement in due form. This statement set out the following facts for the information of the public: “ The amount of the capital stock of said association is twenty-five thousand dollars payable in lawful money on the execution hereof.” The persons subscribing to the stock and the amount subscribed by each was stated as follows: “ The said Samuel N. Stetler subscribes for eight thousand dollars, said Edward L. Fuller subscribes .for eight thousand dollars, and the said Robert W. Archbald subscribes for nine thousand dollars.” The business to be done by the association is stated to be “the owning and leasing of mines and coal lands, and the mining, preparing, shipping, buying, and marketing of anthracite coal, together with all matters incident thereto.” This statement followed the act of assembly, and as to its form was entirely regular, but the proofs show that not one dollar was paid by either of the subscribers to the stock. It was nevertheless recorded, and the Amity Coal Company, Limited, entered upon its business career without a farthing in its treasury or an article of property in the world. This was not a compliance in good faith with the requirements of the act of 1874. The purpose of that act was to foster legitimate and honest undertakings where capital was “ subscribed and contributed ” by persons desiring to engage in business, and not to bring into life a brood of associations without capital, without a treasury, and possibly without a solvent subscriber. But this association was not merely an empty shell, for its statement was misleading and deceptive. It provided for a capital of §25,000, which was made payable on the execution of the statement. It was subscribed and acknowledged and then regularly recorded, without the payment of a dollar of the subscribed capital. The only source of information, besides the statement which the law provides for, is the “ subscription list book ” which all such associations are required to keep, but which this one never opened. The fair import of the language of the statement that the subscribed capital was payable “ on the execution hereof,” is that it was to be paid down; and the subsequent recording of the statement is an assertion that the subscribers-have performed their promise and paid their subscriptions into the treasury. To enter upon business with the credit which the possession of a paid-up capital of §25,000 would give the association, when in fact nothing had been paid, either in money or property, was an evasion of the law and a fraud upon the public.

In saying this we do not impute an intention to defraud, or reflect upon the motives of the gentlemen by whom the Amity Coal Company was organized. They may have supposed themselves to be complying with the provisions of the act. Our business is not with their motives, but with what they did; and our inquiry is whether this association was organized in accordance with the fair interpretation of the act of 1874. The act provides for the protection from personal liability of those who “subscribe and contribute ” a capital to be employed in any lawful business. The “capital” is staked upon the success of the business, but because the amount of the capital appears upon the statement on record and the “subscription list book ” on the desk of the association, all who have occasion to deal with it may know the amount of actual capital within reach, and determine to what extent the association is entitled to credit. But persons who subscribe yet never contribute, and who, by failing to keep a “ subscription list book,” withhold from the public all means of knowing the truth, cannot be within the protection of the act. They really put nothing into the enterprise except the credit of a capital that is actually withheld. They mislead the public and induce confidence to which they are not entitled. In other words, the credit they obtain rests not upon a subscribed and contributed capital, but upon a fraudulent appearance of sucb capital in tbeir statement.

We do not hold it necessary to a valid organization that the entire subscribed capital should be paid into the treasury before an association can begin business. The act of 1874 contemplates the possibility of unpaid balances and provides a, method by which creditors may reach tliem; but we do hold that an association lias no right to enter upon business until some part of tbe subscribed capital has been actually paid. The statement should show when and in what amounts the subscriptions are to be paid, and the subscription list book should thereafter show tbe payment or the failure to pay tbe instalments falling due after tbe recording of the statement, so that members and creditors may see at any time the exact situation of the association. These are the terms upon which the statute promises individual immunity from the debts of tbe concern, and they must be complied with fairly and honestly. Where persons seek the benefits of an act of assembly they must take them upon the terms which the act prescribes, or not at all. In Malony v. Bruce, 94 Pa. 252, Paxson, J., said: “ If parties seek to have all the advantages of a partnership and jet limit their liability as to creditors, they must comply strictly with the act.”

Under the limited partnership act of 1836, the same rule was repeatedly held: Richardson v. Hogg, 38 Pa. 153 ; Guillou v. Peterson, 89 Pa. 163. The recent case of the Appeal of the Hite Natural Gas Co., Limited, 118 Pa. 436, is very nearly in point. In the recorded statement, Hite’s subscription for $80,000 of the capital stock was stated to be paid by the transfer to the company of the right of way for the pipe line, etc., when in fact the right of way had not been procured. Tins was a false statement as to a material fact affecting the capital of the company, and it was held that it rendered the subscribers liable to creditors as partners.

But it is urged that Mr. Strong, who was not a subscriber to the stock, paid fully and fairly for the interest which he subsequently bought in the association, and that he ought not to be held liable for the misrepresentations of the original subscribers. The organization took place on June 18, 1883. On the 17th of November following, Mr. Strong purchased ten shares and paid one thousand dollars, their par value, into the treasury. He did not purchase from one of the subscribers who held the entire stock, and pay to him for his shares, but he paid to the treasurer. He had notice therefore that the stock then issued to him had never been paid for. If he had made inquiry, as he was bound to do, into the manner in which the association had been organized, and whether the act of 1874 had been complied with in good faith, he would have learned the facts; and he is chargeable with notice of all that such an inquiry would have disclosed. He then had notice in law, if not in fact, that not one dollar had ever been paid by the subscribers, either at the execution of the statement or at any intermediate date, and that the association was without money or property with which to conduct business or pay .its liabilities. With this notice he purchased an interest in the association and subsequently became one of its managers.

It is not easy to see upon what principle he can be said to stand on better ground than his associates. He bought into an association organized in disregard of the aet of 1874, doing business without a capital and as a matter of speculative adventure. It was an empty shell, a sham; and Mr. Strong’s position is tlie same as if lie bad bought into any other insolvent firm. He did not become liable for debts contracted before he became a member, but for debts contracted afterwards, ho and his associates are liable as partners. Mr. Strong’s honest payment for his interest cannot cure the vice which infected this association from its organization, or relieve him from the legal consequences of his connection with an insolvent firm.

Judgment reversed, and venire facias de novo awarded.

On May 14, 1888, a re-argument of the foregoing cause was ordered on motion of the defendants.

Mr. Bvere.lt Warren and Mr. J. Vaughan Darling (with them Mr. Bdward N. Willard and- Mr. Charles S. Welles'), for the plaintiffs in error.

Mr. W. H. Jessup and Mr. John Gr. Johnson (with them Mr. JE. B. Sturgess and Mr. William Strong), for the defendants in error.

Opinion,

Mr. Justice Williams :

The persons composing a partnership may agree with each other to invest a certain fixed sum each in the common venture, and no more. Such an agreement may limit the interest of each in the property and profits of the firm, but it will not limit the liability of any for the firm debts. Each member will be liable individually for the entire indebtedness of the firm. The act of 1874 was passed to relieve against the risk and inconvenience attending general partnerships, by providing a mode by which individuals might invest a fixed sum in a business enterprise, without liability to loss beyond the sum so invested. The method provided is the creation of a new artificial person to be called a joint stock association, having some of tlie characteristics of a partnership and some of a corporation.

The process by which this new organization is brought into business existence is plainly laid down in the statute. Three or more persons may agree to form such an association. They must put their agreement in writing, in the form not of a contract with each other, but of a certificate for the information of the public. This must bp signed by every member of the association, and, as a further assurance of its truth, it must be acknowledged by them. It must set out, among other things, the names of the persons uniting in the enterprise, and the name by which the new artificial person is to be known; the total capital subscribed and the amount subscribed by each member, and a statement showing when and how it is to be paid. When the certificate has been prepared, signed and acknowledged, and when the payment of capital into the treasury has been made in accordance with its terms, the preliminary work of organization is completed, and the association is ready to he called into life by the organic act, the recording of the certificate. This gives it existence and a name in the business world. Thenceforward the promoters cease to act as individuals or as partners in the common business, but through and in the name and upon the credit of the joint stock association. When the association enters upon its business life, it should have in its treasury the capital, or so much thereof as the recorded certificate endows it with at the outset; and the balance remaining unpaid, in accordance with the terms of the certificate, should appear upon the stock subscription book provided for by the act, so that a creditor or. any one interested to know could determine whether and to what extent the new business agency was entitled to credit.

In the case of business corporations, the certificate that at least ten per cent of the subscribed capital has been paid in goes to the governor, and he then issues letters-patent, which impart life to the corporation. In the case of joint stock associations, the members are trusted by the law to certify directly to the public without the intervening agency of the governor, and thus to give life to their own creature. Under such circumstances the courts should require absolute good faith and an honest compliance with the law from those who claim exemption from individual liability as members of a joint stock association. If no capital has "been put into the concern, no actual cash with which to begin business, it has no right to begin business. The subscribers have no right to record the certificate, and to do so is a fraud upon the law and a fraud upon the public. We do not say that the entire capital must be paid down. The law does not say so, but seems to contemplate a payment by instalments. What we do say is, that until some part of tbe capital lias been paid in conformity with die certificate, the recording of the certificate is not authorized by the law, and can give no business life to the limp and empty framework of the association. In analogy to the business corporations of tbe state, ten per cent of tbe subscribed capital would seem to be the minimum amount to be actually provided for and paid into tbe treasury before tbe recording of tbe certificate, which, as we have already said, should show the times of subscription truly, and should be complied with fully and honestly before it goes upon the record.

This was substantially said when this ease was before us one year ago. A fresh examination of the subject, aided by an elaborate re-argument, lias not persuaded us that we were in error in the views then expressed.

Turning now to the facts of this case, they seem to leave us no alternative under the salutary rule laid down. This certificate when prepared put the capital stock at twenty-five thousand dollars. It gave the names of the subscribers and tbe amount of stock subscribed by each. In obedience to the statutory requirement to state when and how the subscribed stock was to be paid, it stated, “to be paid on the execution hereof.” Now the first thing to he done was to execute the certificate. After that was done, it was to be acknowledged as an assurance of its truth; then it was to be recorded as the certificate of those signing it, made to tbe public, that its provisions bad been complied with. The recording of tbe certificate was therefore a distinct affirmance that tbe capital to be paid on its execution had been paid, and that the association was entitled to the credit which its capital should command. The fact was, however, that neither of the stockholders paid one cent on the execution of the certificate, nor at its acknowledgment, nor when it was recorded, nor yet when they began business in the name of the association.

It is useless to argue that such conduct is a compliance with the requirements of the act. It is a palpable disregard of the act of 1874, and of the requirements of business bonesfcy.

We speak of tbe facts as they appear upon this record. The case goes back for a new trial. If upon sucb trial, with attention directed to this point, a different showing is made and the facts necessary to a legal organization are made to appear, the ease may be taken out from the operation of the rule ; but, on the facts before us, we hold that the subscribers to the stock in this association, by reason of their disregard of the law under which they attempted to organize, acquired no rights under it, but became liable as general partners for all the debts contracted in the name of the association. Nor do we see our way clear to relieve one who bought an interest in the concern months afterward and honestly put his money into its business. Like one buying into an ordinary mercantile partnership, he was bound to inquire into the organization and condition of the concern in which he was about to invest his money.

The order heretofore made reversing the judgment of the court below remains in full force.

Mr. Chief Justice Paxson and Mr. Justice Mitchell dissent.