McKay v. Beard

The opinion of the court was delivered by

On March 1st, 1878, the legislature granted a charter to “'William J. Beard and such other persons as he may associate with him, their successors and assigns,” who were constituted a body politic and corporate by the name and style of “ The Lynch’s Creek Navigation Company.” 16 Stat. 382. The object of said company was to improve the navigation of said creek by clearing out obstructions and to carry on a general transportation business on its waters.

'Some time in October, 1879, the said Beard, the defendant in this action, by a formal deed sold and conveyed to the plaintiff *161a one-half interest in the franchises and property of said corporation, and associated the plaintiff with him as one of the corporators. On the same day the plaintiff and defendant entered into a special verbal agreement, by which each was to contribute one-half of the expenses incurred in carrying on the work, the profits of which were to be. divided equally between them; but no debts to outside persons were to be contracted without the consent of both of said parties. It does not appear that any formal organization of the company was ever effected by the election of officers, adoption of by-laws, &c., as is usually done by incorporated companies; but they appointed one E. H. McNeill agent and treasurer, who kept the books and credited each of the said parties with the money and supplies furnished by them respectively for the purpose of carrying on the work, and no debts to outsiders seem to have been contracted.

The business was carried on in this loose way until some time in April, 1881, when, the defendant becoming dissatisfied, the special agreement hereinbefore referred to was abrogated, but no steps were taken by either party towards a formal dissolution of the corporation or winding up its affairs. On the contrary, the business was still carried on up to the time of the commencement of this action and afterwards, McNeill continuing to act as agent and treasurer, keeping an account of the receipts and disbursements. It appears that up to April, 1881, when the special agreement was terminated, the defendant was indebted to the plaintiff under that agreement in the sum of $926.69, and that the balance due for money and supplies furnished by the plaintiff after that time and up to August 21st, 1882, when the-last report of the master was made, after allowing all credits for freights received and correcting certain obvious errors in the calculation of the freight on staves transported for Webb & Davis, and for Commander, was' $7,210.88, for one-half of which it is claimed that defendant is liable.

The Circuit judge held that, while there was no formal organization of the company, yet the conduct of the corporators, in going to work under their charter, and especially the terms of the deed by which the defendant associated the plaintiff with him *162as a member of the company, amounted to an acceptance of the charter, and was a sufficient organization of the company to constitute the relation of corporators between them, and that the special agreement by which the work was to be done at the joint expense of said parties, each being liable for one-half thereof, was entirely consistent with such relation. He, therefore, held that the defendant was personally liable to the plaintiff for the said sum of $926.69; but that for all expenditures made after the termination of the special agreement, he could not be made personally liable, and that one-half of such expenditures, to wit, the sum of $3,605.44, was an equitable charge upon the share of the defendant in the company, to the payment of which such share should be subjected. Accordingly, he rendered judgment against the defendant personally for the said sum of $926.69, and ordered that the interest of the defendant in said company be sold, and the proceeds applied, first, to the payment of the costs of these proceedings, as well as the expenses of such sale; next, to the payment of the said sum of $3,605.44 to the plaintiff; next, to the payment of the aforesaid judgment for $926.69; and that any balance that may remain should be paid to the defendant.

From this judgment defendant appeals upon the following grounds :

1. “His Honor erred in his finding that a corporation was organized between plaintiff and defendant under the charter granted defendant.

2. “ If his Honor is correct in his conclusion that a corporation was formed, then he should have found that the agreement between them constituted the only rules or by-laws by which they were to be governed.

3. “ His Honor erred in not finding that, by this agreement, when defendant dissented from a further continuance of the work on said creek after April, 1881, it was a dissolution of said corporation, and all work done by plaintiff subsequent to that date was done at plaintiff’s own risk; and defendant’s share in said franchise is not chargeable therefor.

4. “His Honor erred in giving personal judgment against defendant for the sum of $960 (?) — amount found to be due *163April, 1881. It should have been made an absolute and not. contingent charge on defendant’s share on final settement between them.

5. “His Honor erred in not ordering a sale of the shares of both parties instead of defendant’s share alone.

6. “ His Honor erred in not decreeing, in order that an equitable settlement might be effected, that the enhanced value of the said stream for navigable purposes, if any, between April, 1881, and the date of the charge made by plaintiff for the work put on it subsequent to that time, be ascertained, and the share of defendant for such enhanced value, together with amount due plaintiff up to April, 1881, be deducted from the sale of the entire property, and the balance df amount realized from the sale should be divided equally between them.” .

The first gi’ound of appeal is, we think, sufficiently answered by the reasoning employed and the authority cited by the Circuit judge, to which, however, we may add a reference to Ang. & A. Corp., § 83. After a corporation, duly constituted by act of the legislature, which corporation is composed of only two persons, has entered upon the work for which the corporation was established, appointed an agent, expended large sums of money on such work, and done acts which it would not have been lawful to do but for the charter granted by the legislature, it is too late to say that such corporation had never accepted the charter, or been organized as such, even though it does not appear that there was ever any formal organization by a meeting of the corporators and an election of the usual officers.

The second and fourth grounds of appeal, which may be considered together, rest upon a misconception of the scope and effect of the special agreement entered into by the parties after the plaintiff had been, by the formal deed of the defendant, admitted as a member of the company, which the act of legislature had declared should be a body politic and corporate by the name and style of “The Lynch’s Creek Navigation Company.” The corporation thus created having no cash capital, it was necessary that the money required to carry on the work should be obtained in some way. This could have been done either by borrowing it on the credit of the corporation from some third person or *164from the individual corporators. The former mode was not, and perhaps could not have been pursued, as the corporation, having no cash capital and no property, except its franchises, would not be likely to have any credit. Hence, the other mode was resorted to; and the special agreement was entered into whereby the work was to be carried on at the joint expense of the parties, each being liable for one-half of such expense. This amounted, practically, to the same thing as if the money necessary to carry on the work had been borrowed from a third person on the individual credit of the parties, and their joint note had been given for the amount borrowed, each being liable as between themselves for one-half thereof.

This, it seems to us, is the true view of the scope and effect of the special agreement; and we are unable to see how it can be regarded as constituting the by-laws of the corporation. There is nothing whatever in the nature of the agreement, or in any of the evidence offered, which shows that such agreement was ever designed to constitute the by-laws of the corporation; but, on the contrary, we think it plain that the sole purpose of the agreement was to raise the means necessary to carry on the work without contracting any liabilities to outsiders. This being so, the effect of the agreement was the same as if the parties had given their joint note to a third person for the amount furnished by him to carry on the work, upon which each of the said parties, as between themselves, should be liable for one-half. Now, if such note had been given, and the whole amount of it had been paid by the plaintiff, could it, for a moment, be questioned that' the defendant would be personally liable to the plaintiff for one-half of the amount so paid? And, in our judgment, there is as little doubt that he is personally liable to the plaintiff for one-half of the excess furnished by plaintiff under the special agreement for the purpose of carrying on the work. The second and fourth grounds of appeal cannot, therefore, be sustained.

It is very difficult for us to understand, with our view of the scope and effect of the special agreement, how it can be contended that when such special agreement was abrogated by the refusal of the defendant to be any longer bound by its terms, a dissolu*165tion of the corporation was thereby effected. As we have seen, the agreement was a matter outside the corporation and altogether a private and personal arrangement between the plaintiff and the defendant; and, therefore, even if a corporation could be dissolved in this way, we do not see how the abrogation of such an agreement could possibly have any effect whatever upon the corporation as such, except, perhaps, by crippling its means of carrying on the work for which it was constituted; and, as the event has proved, even that effect was not experienced. We are unable to see, therefore,, how the third ground of appeal can be sustained.

The sixth ground of appeal is manifestly based upon the theory that the corporation was never actually established, and that the parties stood toward each- other in the relation of tenants in common, and, hence, a rule supposed to be applicable to that relation is sought to be applied here. But, as we have seen, this is an entire misconception of the relations of the parties, and, hence, there is no basis upon which to rest this ground of appeal.

The fifth ground of appeal presents greater difficulties. After the abrogation of the special agreement in April,-1881, the corporation was thrown upon its own resources; and if the work was to be continued, as it should have been under the charter, it must have been carried on upon the credit of the corporation. The amount furnished by the plaintiff after that time for carrying on the work, as the corporation in good faith was bound to do, constituted a debt of the corporation for which neither of the corporators could be held individually liable, and the plaintiff’s claim, therefore, was against the corporation as such, and not against the defendant individually, or against his interest in the company. It seems to us, therefore, that for the payment of such claim, the whole property and franchises of the corporation, or so much thereof as might be necessary for the purpose, should have been ordered to be sold, and not merely the interest of one of the corporators. For, besides the fact that an undivided interest in property of this kind would not be likely to bring its full value at a public sale, the debt which has rendered the sale necessary is, as we have seen, the debt of the corporation, and not of the individual member whose interest has been ordered to be sold, and, hence, for the enforcement of *166the payment of such debt the property of the corporation should be sold.'

The rights and interest of the plaintiff can be and should be fully protected by providing, as the Circuit judge did provide, that if the plaintiff becomes the purchaser the master shall take as cash his receipt for so much of the purchase-money as he may be entitled to under the decree that shall be made, he paying in cash a sufficient amount to satisfy the costs of these proceedings and the expenses of the sale. The proceeds of the sale should be applied, first, to the payment of such costs and expenses; next, to the payment of the amount due to plaintiff for money and supplies furnished to carry on the work since the abrogation of the special agreement in April, 1881, and the balance, if any, be equally divided between the plaintiff and defendant, the share of the defendant in such balance to be subjected to the payment of the personal judgment against him for $926.69 hereinabove mentioned.

It may be that the work, has been continued since the last report of the master, and that the corporation has incurred further liabilities to the plaintiff, and has received further income from the transportation of freight and passengers, and that it may be proper to have a further reference to adjust these matters; but as the case must go back to the Circuit Court, we do not decide anything on these points, but leave them for that court to determine.

Although all persons interested in the corporation are now before the court, yet they are parties .only as individuals; and under the view which we have taken it will be proper, in order to have the record technically correct, that the corporation as such should be made a formal party. Leave is therefore granted to the plaintiff to amend accordingly..

The judgment of this court is that the judgment of the Circuit Court, except as modified herein, be affirmed, and that ihe case be remanded to that court for such further proceedings as may be necessary to carry out the views herein announced.