Hill, Keiser & Co. v. Stetler

[To be reported.] 1. Where the recorded statement oía limited partnership organized under the act oí June 2,1874, P. L. 271, set out that the total amount of capital was $25,000 “ payable in lawful money on the execution hereof,” but the association began business with no part of its capital paid in, and opened and kept no subscription list book, its organization was not in compliance with the requirements of the act and the members were liable as general partners. 2. Persons who subscribe but do not contribute, and who by failing to keep a “ subscription list book,” as required by the act, withhold from the public the means of knowing the amount of capital within reach, are not within the protection of the act, but are liable individually as general partners, including a member subsequently coming in affeeted with notice of the defective organization. 3. While it is not necessary that the entire capital should be paid in, before a limited partnership may begin business, yet it has no right to begin until some part of its capital subscribed has been actually paid; its statement should show when and in what amounts the subscriptions are to be paid, and the subscription list book required should thereafter show the payment or non-payment of the instalments as they fall due.

EBBOB TO THE COURT OF COMMON PLEAS OB’ LACKAWANNA COUNTY. No. 58 January Term 1888, Sup. Ct.; court below, No. 212 October Term 1885, C. P. On July 8, 1885, Hill, Reiser & Co., Limited, brought assumpsit against S. N. Stetler, E. L. Fuller, R. W. Archbald and Theodore Strong, doing business as The Amity Coal Company, Limited, to recover tlie sum of 0410.82 with interest, the price and value of furniture sold and delivered by the plaintiffs to tlie defendants at their request. The defendants pleaded, nonassumpsit, and one of them, Mr. Strong, filed an affidavit of defence denying general partnership and alleging that The Amity Coal Company, Limited, was an association organized under the act of June 2, 1874, P. L. 271, by statement duly recorded. At the trial on April 4, 1887, the plaintiffs put in evidence the statement of association of S. N. Stetler, E. L. Fuller and R. W. Archbald, dated June 18, 1883, acknowledged June 18, 1883, recorded June 20, 1883. The certificate or statement was drawn in due form, executed by the persons named, and contained the following paragraphs : “ 2. The total amount of the capital of the said association is twenty-five thousand dollars ($25,000), payable in lawful money upon the execution hereof. “3. The amount of said capital subscribed for by each of the said parties is as follows, to wit: the said Samuel N. Stetler subscribes for eight thousand dollars ($8,000), the said Edward L. Fuller subscribes for eight thousand dollars ($8,000), and the-said Robert W. Archbald subscribes for nine thousand dollars ($9,000.) “ 4. The business to be conducted by the said association is the owning and leasing of mines and coal lands, and the mining, preparing, shipping, buying, vending, and marketing of anthracite coal, together with all matters incident thereto. “ 5. The business of the said association is principally to be conducted in the township of Lackawanna, county of Lackawanna, Pennsylvania. “6. The name of said association is “ The Amity Coal Company, Limited,” and the contemplated duration thereof is twenty years.” Then the plaintiffs, under exception noted for the defendants, showed by an examination of Fuller and Stetler, called as on cross-examination, that the defendants had no subscription list book, and neither of the defendants had ever signed any subscription list other than the articles of association; that none of the capital was paid in when the articles were recorded; that not all of the capital was ever paid in; that on November 17, 1883, defendant Strong bought of the company ten shares of stock which had been set aside for Thomas D. Davis, who did not take them, for which ten shares Strong paid $1,000 into the treasury of the company, and that on Decernber 15, 1883, Strong was elected a member of the company; that when he was elected, Strong inquired whether the stock was paid up or not, and “ we informed him we expected or intended to pay all stock whenever it became necessary, — the stock that was unpaid.” It was also shown that on November 24, 1884, Strong was elected one of the managers of the company, and paid other sums on his stock. The plaintiffs then proved that the bill of goods for which suit was brought was sold to the defendants between January 8, and February 17, 1885, when all of the defendants were members of the company, and rested. Thereupon the defendants moved for judgment of nonsuit assigning the following reasons: 1. That the parties sued were associated as The Amity Coal Company, Limited, an organization organized under the act of 1874, by statement duly signed, acknowledged and recorded, as required by the act of assembly, and that such statement has not been shown to be untrue in any particular; and further, that the statement is all that is required by the act of assembly to protect the associates from being sued as general partners. 2. That the claim in suit, according to the testimony of the plaintiff, was not charged to The Amity Coal Company, Limited, but to The Amity Coal Company; and that all the books of the plaintiff in evidence show that fact, that the partnership to whom the goods were charged was not the partnership against which this suit was brought. 8. That if upon the face of the statement as filed and recorded, any inference is to be drawn, the stock subscribed had actually then been paid. That Theodore Strong, who afterwards purchased and had no knowledge to the contrary, was a bona fide purchaser of the stock of this association, and as such should be protected in his purchase, and could not be held as a general partner under any claim of a false statement of which he had no knowledge at the time he purchased his stock. That Theodore Strong, E. L. Fuller, S. N. Stetler, and It. W. Archbald, being all sued as partners forming one partnership under the name of The Amity Coal Company, Limited, if no recovery could be had against Theodore Strong, no recovery could be had in this suit against the other persons named as defendants. The court, Hand, P. J., allowed the defendants’ motion and entered judgment of nonsuit, with leave to the plaintiffs to move, etc. The motion having been argued, the court, Hand, P. J., on J uly 9, 1887, filed the following opinion and order : Rule to show cause why judgment of compulsory nonsuit shall not be stricken off, 1. As to Theodore Strong one of defendants ; 2. As to the other defendants. The presentation of this case was not made with that care and orderly arrangement of evidence and the law which the court have the right to expect on the part of counsel and which usually characterizes the learned counsel engaged in the case. In the confusion of questions and evidence we are however enabled to state the following which covers all the points raised by the counsel for the plaintiffs, viz.: that the defendants are each and all personally liable as members of a general partnership: 1. Because the certificate which they filed under the act of June 2, 1874, was false, because the capital stock had not been paid in when the certificate was recorded, and 2. Because they kept no subscription list book as provided in the last clause of § 2 of the act. $ % -#* * * *#• * The sole question for disposition in the case is, whether, as sought by the plaintiffs, a verdict and judgment on the evidence could be entered against these defendants as individuals. No verdict was asked against the association by name, and no amendment was asked to strike out the individual names and proceed against the association, with leave subsequently to ask for execution against individual stockholders as provided by the act. It is a question partly of the construction of the act on the merits of this controversy, and partly of practice. In regard to the merits the whole controversy turns upon whether the statement filed of record was a false statement. The alleged falsity of the statement turns wholly upon the construction to be placed on the words in clause 2 of the statement relating to the capital, viz.: “ payable in lawful money upon the execution hereof.” It is alleged that with this clause in the statement, the actual non-payment of the capital at the time it was recorded, made the statement false, and the whole proceeding or attempt under the act of 1874 a nullity so far as that act is concerned, and constituted the joint stock company, ever after that, a general partnership. On the other hand, it is asserted that there is no false statement; that the true and natural meaning of the words in law is, that the language fixed a time when the capital was due, and payment could be enforced both as among the subscribers and with creditors. Before we proceed to a consideration of the act itself, which is involved in the range the argument has taken, we first construe the clause in question. It will be observed that section 2 states that “ the total amount of the capital of said association is §25,000, payable in lawful money upon the execution hereof.” In section 3 each member “subscribes for eight thousand ” (or his amount) “ dollars,” and the evidence shows the statement filed is the subscription. The act does not require a payment at the time of subscribing; it requires a “subscribing and contributing” capital at some time. It leaves the matter of “ when and how ” the capital shall bo “ paid ” to be fixed in the statement filed. It makes provision for the collecting of unpaid subscriptions on the basis of the integrity of the organization, as an organization, in § 2 of the act. Such being the case, we apprehend, that no other construction is to be put upon the words “payable on the execution hereof,” than would be put upon the same words in articles of agreement, or a mortgage, or deed. It was never understood in an agreement or deed that “payable on the execution hereof” signified that the amount was actually paid by such execution, or was an acquittance to the vendee or grantee of such payment. It has no other significance than that the sum is “to be paid” on that event or day, and is no evidence of a fact accomplished. The statute requires that it shall be stated when the capital is “to be paid,” nor does the word “payable ” stand in any sense equivalent to “ paid.” Its legal meaning is that the amount becomes thereby due and its payment can be enforced. We can see no falsehood practiced on any person by the recording of the certificate without the payment of the money. Ordinarily the execution of an instrument of writing signifies the whole act by which the instrument becomes of force, its signature and delivery, or if a recording is essential to its existence and validity, also its being recorded. Be this as it may, in this case the act of assembly does not contemplate that the statement filed is evidence of when or how much of the capital stock is actually paid. That must be ascertained by the book or books kept by the association which are required for that purpose. One of the reasons, undoubtedly, why the law did not require the subscriptions to be paid up, in order to make the association valid, was that the capital might not be needed at once. No wrong would thereby be done to creditors, because they could ascertain how much was paid. In the case at ■bar, payment by Strong was made before the plaintiffs sold any goods to the association, and before, so far as this case appears, any business was transacted. It may be assumed without question that when all the requisites of the act of 1874 are complied with, and the statement contains truthfully those requisites, that a joint stock company with limited liability is formed, and that general liability is not incurred except under the provisions of the statute. This the statute expressly provides for. These requisites are, (1) that three or more persons shall sign and acknowledge duly a statement in writing; (2) which shall set forth the full names of such persons; (3) the amount of capital of such association subscribed for by each; (4) the total amount of capital and when and how to be paid; (5) the character of the business to be conducted, and the location of the same; (6) the name of the association with the word “ limited ” added thereto, as part of the same; (7) the contemplated duration of said association, which shall not exceed in any case twenty years; (8) the names of the officers selected in conformity with the provisions of the act. All these requisites are literally and strictly fulfilled in this charter. The statement is duly signed and acknowledged by three persons, their full names are set out, the amount of the capital is $25,000. Stetler subscribes for $8,000, Fuller, $8,000, and Archbald, $9,000. The capital is payable on the execution thereof, the business is clearly stated, the name is The Amity Coal Company, Limited, its business is to be conducted in the township of Lackawanna, in the county of Lackawanna, Pennsylvania, its duration is twenty years, and its officers are the three persons who form the association. Most of the argument in this case has been drawn from the decisions which relate to special partnerships, in which some of the partners are general and one or more are simply special. The associations organized under the act of 1874 are an entirely distinct class of, organized bodies. This is stated in the elementary works on partnership, and the decisions of our own courts. A limited liability is attempted to be secured to all the members and it is secured by fair, explicit and strict provisions, and in a way which when complied with not only protects the members, but protects all creditors who choose to avail themselves of the knowledge which the law and the books of the association give them of such associations. When the members are within the protection of the act, then it should be held as a shield to them, and creditors and members should be required to conform to the act in seeking these remedies at law. We have seen that this organization in its inception did comply with the act of assembly. The plaintiff, however, in commencing this action assumed, on the mere fact of non-payment of their subscriptions by Stetler, Fuller and Archbald, at the time stipulated and before the statement was recorded, that the whole organization was absolutely void as a limited liability association, both as regards themselves and Strong, who came in subsequently. The act itself pointed out clearly and equitably to all parties concerned, their mode of procedure for non-payment of the capital stock or subscription. They could have sued the association, recovered their verdict and judgment, and then on motion and a rule in case they failed against the association, they could have had their execution against the individuals for the non-payment of subscriptions or any part remaining unpaid. Their whole assumption, in this part of their case, rests on the false foundation that the mere non-payment of the subscription at the time stipulated, avoided the association and made a general partnership. This false foundation giving way, their whole superstructure falls with it. It is true that an attempt to form such a joint stock company, or a corporation, which contains a fatal defect, would avoid all proceedings under it and make the stockholders or members general partners ; it is also true that when a special or limited liability is set up as a defence, that the statute must be strictly followed which creates the limited liability; but when virtue is once given to an organization under the statute, and its integrity is untainted by technical or formal defects, then the limited liability is secured and remains, unless it is lost by a subsequent violation contemplated by the law itself. This general doctrine of special partnerships is clearly and emphatically laid down as a part of this act of 1874, and we shall discover by.an examination of the cases that so far as this act has come under construction by our higher court, the remedies have been pursued under the act of 1874, in every case where there was a substantial compliance in the organization. ' This plaintiff sues the individual partners in the first instance. Section 2 of the act, expressly provides that “the members shall not be liable under any judgment, decree or order which shall be obtained against such association, or for any debt or engagement of such company, further or otherwise than is hereinafter provided.” What is further or otherwise-provided? 1. The collection of the unpaid subscriptions, to the extent of the portions respectively not paid up, and provision is made for the execution. And in order that the extent of the unpaid subscriptions may be ascertained, the court has full power to compel the production of books. And a “ subscription list book ” is required to be kept, of which we shall have something further to say. 2. The omission of the word “limited” makes each member participant in such omission liable personally. Section 3, act of May 1, 1876, P. L. 89, which is supplementary to the original act, and now part of it, provides that such association shall be sued in its association name. It will therefore be discovered that it is a logical legal conclusion that for the remedy here sought, viz.: the payment of a debt by an individual member because of the non-payment of his subscription, the act gives a full and complete remedy by suit against the association and then by execution, first, against it, and (if not successful) then by execution against the individual for so much of his subscription as is unpaid. No action can be maintained against the stockholders in the first instance, one or all; it not only is not provided for, but it thoroughly ousts the legal remedy provided. It also conflicts with the equity of that legal remedy, because the members may have paid in in unequal proportions. In the present action the evidence shows a full payment of stock by Strong, a large payment by Stetler, and possibly up to a certain date, none by the two others. A verdict and judgment in this action would be against Strong for the whole debt as well as against Stetler. It is perhaps to be regretted that the plaintiff did not ash to amend and save time by taking judgment against the association, but that is not now before us. We state the general propositions of law which seem to us to govern in associations of this kind. Where there is a totally defective organization never instinct with life under the statute, the members may bo sued in the first instance as a general partnership. When the association is once legally created, the remedies must be pursued as provided by the statute, when for non-payment of subscription, first against the association and then against the individual stockholders in default. In regard to the claim made that there was no “ subscription list book” kept, If this be true, which the plaintiffs have not shown, the act does not make the absence of that a cause of individual liability. The purpose (“for that purpose”) for which that book is to be kept is to aid the court to ascertain the truth in regard to the unpaid subscriptions. It was assumed on the argument by counsel that that book meant an original subscription by sign manual; the term does not so signify. From the evidence, Fuller testified that they considered their original subscription in connection with the stock Ledger, which he said “ showed the transaction,” made a subscription list book. From it he gave the whole data of subscribers’ stock and payments. The book was not formally put in evidence and we have its character only from Fuller’s testimony. We do not say that a separate book, perhaps made out by the secretary, and styled technically “ a subscription list book,” would not be the best mode of meeting this requirement, but the plaintiff has not clearly shown that this provision was not substantially complied with. Even if the other members were deficient in this respect, Strong is in no way chargeable with such neglect. w $ * & & In the case at bar every requisite of the act is complied with; the sole delinquency, which is a fact outside of the statement filed, and one contemplated by the act of assembly, is expressly provided for by the act of assembly. So far as this plaintiff is concerned, he has suffered no injury which is not expressly provided for under the act; lie shows no inquiry nor state of facts, which upon inquiry would not have furnished the exact information, as the evidence discloses, contemplated by the act, and upon which he has his legal remedy, as well by pursuing the remedy provided by the act as by a ■suit against defendants as general partners. We have deemed it important to enter upon the question of practice in this case, because the act of assembly is new in our commonwealth, and when properly understood one of great benefit both to members and creditors and the public at large. The act is taken mainly from English statutes on the same subject, and the decisions in the English courts, so far as we have been able to examine them, clearly point out the mode of practice and the remedies, as we have stated in the foregoing opinion and as are foreshadowed in the few cases which have arisen in this country. The law relating to this class of associations is distinctive, as already intimated, and they are classified as joint stock companies, both in English and American digests and opinions. We are satisfied upon the evidence in this case that the proper remedy is first against the association by name, and then, on proper evidence, by application to the court against the individuals, for execution of the judgment after failure to recover from the association. If this is correct, no verdict could have been taken against any of the individual members, and the nonsuit was properly entered. The rule to take off nonsuit as to Theodore Strong is discharged. Also the rule as to the other defendants, Stetler, Archbald and Fuller is discharged. Exceptions. Thereupon the plaintiffs took this writ, assigning for error: 1. The order entering the judgment of nonsuit; and 2, the order discharging the rule to show cause why the judgment of nonsuit should not be vacated.