
    The Western National Bank, Plaintiff, v. Eberhard Faber, Defendant.
    (Supreme Court, New York Trial Term,
    November, 1899.)
    1. Action on the liability of a director for failure to file an annual report — “ Existing debt ” — Discount of notes payable to the president personally.
    Where a corporation is shown to have been in the habit of making notes payable to its president personally and to have paid them, after he had procured their discount, as liabilities of its own, a bank which without inquiry discounted similar notes, whose proceeds have ultimately been received by the corporation, holds a valid “ existing debt ” of the corporation, represented by the unpaid notes. This may be made the basis of an action by the bank to enforce the liability, under the Stock Corporation Law, of a director of the corporation, arising out of its alleged failure to file an annual report.
    2. Same — Annual report, not stated to be as of January 1st — Filing.
    A report, purporting on its face to be the annual report of a domestic corporation for the year 1893, although not in terms speaking as of January 1, 1893, should be deemed a report for that year, sufficient under section 30 of the Stock Corporation Law, where it appears that the directors acted in good faith in making it and intended it as a report for 1893, and there is no proof that, either the capital, assets, or debts, of the corporation had changed between the 1st day of January, 1893, and the twenty-fifth day, the date of the report.
    Where such a report is filed with the Secretary of State during January, 1893, it is not invalidated by the fact that no filing was had in the county clerk’s office until February 1, 1893.
    3. Same — Liability for debts contracted before report made.
    The statutory liability which a director incurs, by the failure of his corporation to file an annual report, for debts contracted before a report is made, does not extend to a note of a third party discounted by a bank for the corporation upon endorsement by the latter before an annual report was filed, but which note did not mature and was not protested until after the filing of such report.
    4. Same — Interest on recovery.
    Where a creditor recovers in such an action, of a director, interest should be allowed on the recovery.
    Action upon promissory notes.
    Charles E. Hughes and Marshall B. Clarke, for plaintifí.
    Benjamin E. Tracy, Francis Forbes and Charles T. Haviland, for defendant.
   Lawrence, J.

The decision of the Appellate Division of this court in Manhattan Company v. Kaldenberg, 27 App. Div. 31, that the report of 1892 was not in compliance with the provisions of the Stock Corporation Law, because not verified by two officers of the company, either the president or vice-president, together with either the treasurer or secretary, is conclusive upon a justice of this department, sitting at Trial Term, and I must, therefore, hold that such report is invalid for that reason. I am of the opinion that the evidence for the defendant establishes that he resigned as secretary and treasurer of the F. J. Kaldenberg Company upon his return from Europe, on the last of October or the beginning of November, 1891. But it is also held in the Manhattan Bank Case, supra, that where the by-laws of a stock corporation expressly declare that it shall have a secretary and treasurer, the neglect of its directors to select 'such officers does not exempt them from liability for a penalty incurred by the failure to file a legally executed report. Under that decision it, therefore, follows that it is immaterial whether the defendant resigned the office of secretary before making that report. He continued to be one of the directors of the company, and, therefore, was liable under the statute for all debts of the company which then existed, and for all contracted before such report should be made. Stock Corporation Law, § 30; Laws of 1892, vol. 2, p. 1832. If, then, any of the notes in suit were debts of the corporation contracted before the filing of the report of 1893, the plaintiff, if entitled to a recovery in this action, is entitled to recover the amount of such notes. It is claimed by the defendant’s counsel that the note (Exhibit C) for $4,500, 'dated December 15, 1892, and the two notes for $1,500 each, one dated March 13, 1892, and the other April 1, 1893 '(Exhibits 'Gl- and H), were invalid on their face, because made payable 'to the order of F. J. Kaldenberg, president of the company, for whom they were discounted, and to whose credit the proceeds were placed. The only difference in the notes.is that, while Exhibits Gr and H are signed by F. J. Kaldenberg, as president, as well as payable to his order, the note for $4,500, although payable to his order, is not signed by him as president, but by the vice-president and treasurer of the company. As all were payable to his order they must stand or fall together in determining whether the company is liable for their amounts to the plaintiff. The rule, of course, is that one who receives from -an -officer of a-corporation its notes or securities in payment of or -as security for-a personal debt of the officer does so at his peril, and that prima facie the act is unlawful, and unless actually authorized '-the ".purchaser will be deemed to have taken with knowledge of the rights of the corporation. Wilson v. Met. El. R. Co., 120 N. Y. 145; Cheever v. Pittsburgh, S. & L. E. R. R. Co., 150 id. 59, 60; Hanover Bank v. American Dock & Trust Co., 148 id. 612, 613. But this rule is subject to the qualification that one who purchases negotiable paper under circumstances throwing upon him the duty of making inquiry as to its validity assumes no greater risk by his failure to inquire than the burden of proving that the facts which he could have discovered, had he inquired, would have protected him. Hanover Bank v. American Dock & Trust Co., 148 N. Y. 612, 613; Wilson v. Met. El. R. Co., 120 id. 145. Now in this case it was admitted upon the trial that the defendant made no question as to the power of the president, vice-president and treasurer to make notes of the company payable to F. J. Kaldenberg’s order. It also appears that the making of such notes was of frequent occurrence. The plaintiff put in evidence more than thirty notes all drawn to the order of F. J. Kaldenberg, running from April 16, 1891, to November 11, 1892 (Exhibits O 1 to J 1). They were obtained from the receiver of the company, and had been paid by the company. These notes were signed, as was the custom of the company, by the president and treasurer, and sometimes by the vice-president and treasurer; and they were .all made before any of the notes which are the subject of this litigation. It seems to me, therefore, that under the rule above stated the plaintiff, in discounting the notes, nothing being shown casting a suspicion on the good faith of its officers, is protected from any claim which might be made that the making of the notes was unauthorized by the Kaldenberg Company. If special inquiry had been made by the plaintiff it would have discovered that the F. J. Kaldenberg Company was in the habit of making notes payable to the order of F. J. Kaldenberg, that such notes were sometimes signed by the president and treasurer, and sometimes by the vice-president and treasurer, that these notes had been apparently paid by the company and were held by it as its canceled obligations, and that the instances in which this had occurred were frequent. The evidence also, in my opinion, establishes that the company received the proceeds arising from the discount of the notes. Such inquiry would, therefore, have revealed a course of dealing on the part of the Kaldenberg Company which would protect an innocent purchaser for value in discounting the notes, or in receiving them as seeurity for other indebtedness. Hanover Bank v. American Dock & Trust Company, 148 N. Y. 612, 613; Grant v. Treadwell Co., 82 Hun, 591. I think, therefore, that the Exhibits C, E and G have been established by the evidence to be obligations whose validity the Kaldenberg Company cannot deny. As to the three remaining notes, D, E and F, it was also admitted by the defendant's counsel that they were proven to have been duly indorsed, and I find that it was proven by F. J. Kaldenberg's testimony that the proceeds of those notes were received by the company. It is true that the witness in a portion of his testimony in regard to some of the notes in suit stated that he was speaking of those notes from his best recollection; but, as no evidence was given contradicting him as to the application of the proceeds of the notes, I am of the opinion that it was prima facie established that the company received the moneys obtained on the discount. The notes, Exhibits E, F, G and H, bearing date respectively February 16, 1893, February 18, 1893, March 13, 1893, and April 1, 1893, were all made and discounted after the date and filing of the report of 1893. It follows, therefore, that if that report was valid the defendant cannot be held liable upon those notes. The only objection which is taken to that report, if I understand the brief presented by the plaintiff’s counsel, is that it is invalid because it does not in terms or by necessary implication state that it was made as of the 1st of January, 1893. It is conceded that at the date of the making of the report of January, 1893, to-wit, January twenty-fifth, and of its filing on the 31st of January, 1893, and the 1st of February, 1893, chapter 688 of the Laws of 1892, amending section 30 of the Stock Corporation Law, which required that the report should be made as of the first of January, was in force. That section, so far as it relates to this case, reads as follows: § 30. Annual report. — Every stock corporation, except monied and railroad corporations, shall annually, during the month of January, or, if doing business without the Hnited States, before the first day of May, make a report as of the first day of January, which shall state: 1. The amount of its capital stock, and the proportion actually issued. 2. The amount of its debts or an amount which they do not then exceed. 3. The amount of its assets or an amount which its assets at least equal. Such report shall be signed by a majority of its directors, and verified by the oath of the president or vice-president and treasurer or secretary, and • filed in the office of the secretary of state and in the office of the county clerk of the county where its principál business office may be located. If such report is not so made and filed, all the directors of the corporation shall jointly and severally be personally liable for all the debts of the corporation then existing, and for all contracted before such report shall be made.” Laws of 1892, vol. 2, p. 1832. It will be observed that the report as filed in the offices of the Secretary of State and county clerk does not in express terms refer to the first of January preceding as the date at which the statements contained in the report are to be deemed as made. Does it by fair implication do so ? The report purports upon its face to be the annual report of the F. J. Kaldenberg' Company, a company organized under the laws of the State of New York, for the year 1893. See plaintiff’s Exhibit R. As before stated, the only objection made to the report by counsel, is that it does not speak of the condition of the company as of the 1st of January, 1893. The statute requires the report to be made annually during the month of January as of the first day of January. The report was dated January twenty-fifth, and was, therefore, made within the month prescribed by the statute. It was filed in the office of the Secretary of State, January 31, 1893, and in the office of the clerk of Westchester county, February 1, 1893. The omission to file the report in the county clerk’s office before February 1, 1893, it having been made and verified by the president and treasurer of the company during the month of January, and filed with the Secretary of State on the 31st of January, 1893, does not affect the validity of the report. Cameron v. Seaman, 69 N. Y. 396. There is nothing in the testimony .which shows that the defendant and the other directors of the company acted in bad faith in making this report, and, in the absence of such evidence, it must be assumed that they were endeavoring to comply with the provisions of the law, and that the report was intended by them to speak as of the 1st of January, 1893. Whitney Arms Co. v. Barlow, 63 N. Y. 62, and particularly the remarks of Allen, J., at p. 67; Wallace v. Walsh, 125 id. 26, opinion of Ruger, Ch. J., at p. 33. The statute, as has been uniformly held, is penal in its nature and should be strictly construed. Whitaker v. Masterton, 106 N. Y. 277; Bonnell v. Griswold, 80 id. 128; Pier v. Hanmore, 86 id. 95. The defendant should not, in my opinion, be subjected to the severe penalty imposed by the statute, unless the report, by fair construction, fails to comply with the statutory provision. It is said that the report does not, by fair construction of the words used in it, comply with the statute requiring it to be made as of the 1st of January, 1893, because the statements in it necessarily relate to the date of the report. The report states: (1) That the capital stock of this company is $500,000; (2) the existing debts of the company do not exceed $285,000; (3) the amount of its assets-at least equals $750,000. Is it not a fair implication that the language thus employed was intended to relate to the time referred to in the statute, to-wit: January 1, 1893, the report, purporting to be made for the year 1893 and having been made and filed within the time required by the statute, there being nothing to show that the capital of the company had been increased! or decreased, nor that the debts or assets had been either increased or decreased intermediate the first of January and the-date of the report, except by the note for $1,307.29 (Exhibit D), on which the company might become liable as indorser, which question will be hereafter considered? See Laws of 1892, voL 2, p. 1832. It is claimed by the plaintiff’s counsel that the decision of the Appellate Division of this court in American Grocery Company v. Pratt, 36 App. Div. 152, is directly in point, and that under that decision the report of 1893 is fatally defective because it does not state that it was made as of the first day of January of that year. In the opinion of the court in that case there is much stress laid upon the fact that as the report then under consideration spoke of the year ending December 31, 1891,. it was plain that it gave the condition of the company as it existed on the 1st of January, 1892; but it is also stated by the-learned justice who delivered the opinion that the statute requiring corporations to make a report as of the first day of January,, prescribed no formula on this head, and that it is not required tosíate literally in the precise words of the statute that the report is made as of the first day of January; that “ the statute is complied with when by fair intendment the report speaks as of the-prescribed date.” In Whitney Arms Company v. Barlow, 63 N. Y. 67, which was an action against trustees for failure to fie a report, the case arose under the act of 1848, as amended by the act of 1853, and the court held that the report which was “made and filed, professedly in compliance with the statute, in the absence of any evidence of an attempt to deceive, or evade the statute, would receive a liberal interpretation, and the benefit of any doubt as to its true intent and meaning would be given to the trustees sought to be charged.” It has never been questioned, so far as I am aware, that that case lays down the correct rule for the guidance of those seeking the proper construction of statutes of this nature, and under it I think that as the report of 1893, involved in this case, should be fairly construed as speaking of the condition of the company as of January first of that year, I must hold that the four notes, Exhibits E, F, Q and H, all of which were made after the making of the report, are not debts of the company for which defendant can be held liable. It remains, then, to consider, as the defendant is liable on the $4,500 note (Exhibit 0), which was made while the default under the report of 1892 existed, whether he is liable for the amount of the note of J. & M. Sanson for $1,307.29. That is Exhibit D. Its date is January 7, 1893. It was indorsed by the company and was discounted by the plaintiff January 9, 1893. It matured May 10, 1893. It is claimed by the defendant that as the company was an indorser only of the note, and default in its payment had not occurred when the report was made, it was not then an existing debt of the company. This answer seems to be conclusive as to the plaintiff’s right to recover upon .that note. The indorser does not become liable on a note until the maker of it has failed to pay it at its maturity and notice to the indorser has been given of such failure. If these views are correct, the plaintiff can only recover on the $4,500 note (Exhibit O), which was made by the company while the default under the defective report of 1892 continued. It is objected by the defendant that interest cannot be allowed on that amount, because this is an action to recover a penalty. Interest has always, I believe, been allowed in such cases, and no case is cited to.- the contrary by the defendant.

Judgment accordingly.  