Atwater v. American Exchange Nat. Bank

152 Ill. 605

• Court: Illinois Supreme Court
• Decided: October 29, 1894
• Status: Published

Opinion

Mr. Justice Magrudek

delivered the opinion of the court:

Upon the former hearing of this cause we held that the judgment in favor of William E. Atwater was invalid, and that he acquired no lien upon the assets of Klemm & Co. by virtue of the levy of execution under that judgment. We see no reason for retreating from that conclusion, nor is any fault found with it by the petition for rehearing filed herein. No rehearing has been asked for by Atwater, or by any of the other creditors, except The American Exchange National Bank of Chicago. The Bank, whose petition for rehearing has never been replied to by any of the other parties, asked a rehearing solely upon the ground that its judgment was held by the former opinion ■of this Court to have acquired no prior lien upon the assets of Klemm & Co. by virtue of the levy of the execution thereunder, but to have been entitled merely to share pro rata with all the other creditors in such assets after the setting aside of Atwater’s judgment. The rehearing was granted, in order that we might consider more fully the question whether the judgment of the Bank was entitled to priority over the other creditors, or to a pro rata share with them in the distribution of the assets. Before passing upon this question, it may be proper to re-state the reasons which have induced us to regard the judg-' ment in favor of Atwater as invalid.

Insolvency, as applied to a person, firm or corporation engaged in trade, is inability to pay debts as they fall due in the usual course of business. That the corporation known as Klemm & Company was insolvent on November 11, 1887, when it executed the judgment note for $9000.00‘ to Atwater, upon which the judgment by confession in his favor was entered up on November 26, 1887, is clearly established by the evidence in this case. Indeed, it had been unable to pay its ordinary expenses for some time prior to November 11,1887. The indebtedness represented by the judgment note which it gave to Atwater on that day was owned by Stewart Spaulding and George D. Whittle, as well as by Atwater. The two former owned more than two-thirds of said indebtedness. Spaulding and Whittle were both directors in the corporation; and Spaulding was its president and Whittle its secretary. Its insolvency was well known to them.

There can be no doubt, that the judgment, rendered by confession in favor of Atwater, was fraudulent and void, as against the Bank and the other creditors of the corporation, to the extent to which the indebtedness included in it was owned by Spaulding and Whittle. When a corporation becomes insolvent, its assets are regarded as a trust fund for the payment of its creditors ; and the directors, who were the agents or trustees of the stockholders during the solvency of the corporation, occupy a fiduciary relation towards the creditors when the corporation becomes insolvent. Consequently, the directors of an insolvent corporation cannot give away the company’s property gratuitously, or sell it at a sacrifice in the interest of others even with the consent of the stockholders; and if the directors are themselves creditors, they cannot receive any advantage or preference in the payment of their claims, at the expense of other creditors. (Beach v. Miller, 130 Ill. 162). In the application of this doctrine, we have held that an insolvent corporation cannot execute a judgment note and submit to judgment thereon in favor of its directors. (Roseboom v. Whittaker, 132 Ill. 81).

We think that, under the circumstances of this case, Atwater stands in no better position than Spaulding and Whittle. Let us examine the facts. The indebtedness to Spaulding and Whittle was originally the indebtedness of The Chicago Custom Clothing Company, and amounted to $10,000.00. When the corporation, Klemm & Company, was organized, and the assets of the Chicago Custom Clothing Company were transferred to it, it assumed the debts of the old corporation, and, among others, the debt due to Spaulding and Whittle. This debt was reduced from $10,000.00 to $9000.00 by a credit thereon of $1000.00, and Klemm & Company executed eight notes, 3 for $2000.00 each, 2 for $1000.00 each, 2 for $417.00 each, and one for $166.00, payable, not to the order of Spaulding and Whittle, or of Spaulding, Whittle and Atwater, but payable to the order of the corporation itself, Klemm & Company. Atwater was not known in the transaction. He did business in Connecticut and lived in New York, and had advanced some money to Spaulding. Spaulding states, that, when he made the loan to the Chicago Custom Clothing Company, he included in such loan not only his own money, but the money in his hands belonging to Atwater. He was the agent of Atwater, so far as the investment of this money was concerned. Atwater’s funds were mingled with his funds, and Atwater had an undisclosed interest in the claim of $10,000.00. Hence, the credit of $1000.00 upon that claim was a credit upon what was due to Atwater, as well as upon what was due to Spaulding and Whittle. Why was this credit given? Spaulding and Whittle each took 5 shares, or $500.00 of stock, amounting in all to $1000.00, in the new corporation of Klemm & Company. They paid nothing for this stock except by a reduction of their debt from $10,000.00 to $9000.00. If then a part of the debt of $6250.00, which was held by Spaulding, belonged to Atwater, a part of the stock, which Spaulding accepted as a payment on that debt, also belonged to Atwater. Hence, Atwater cannot be regarded otherwise than as a stockholder in' Klemm & Company. There is nothing to show that the stock issued to Spaulding was credited exclusively upon that portion of the debt due to himself, and not also upon that portion due to Atwater. The $6300.00 of stock issued to William L. Johnson, and the $6200.00 of stock issued to Henry J. Klemm, were transferred to Charles H. Potter, without any consideration. Potter thus became the owner of $24,000.00 of the stock, which was all of it except the $1000.00 held by Spaulding and Whittle. The eight notes above referred to were all endorsed or guaranteed by Potter. Johnson was the treasurer of Klemm & Company, and he and Potter and Klemm were directors, they and Spaulding and Whittle constituting the board of directors.

On October 12,1887, Klemm & Company were indebted to said Bank in the sum of $3500.00 for money borrowed by it through Johnson and Potter, and on that day Klemm & Company by Johnson as treasurer executed to the Bank a judgment note, upon which it afterwards entered up judgment on November 28, 1887. On November 11, 1887, the directors met, and, with a view of being in a position to get ahead of the Bank, cancelled the eight notes, releasing Potter from his guarantee thereof, and executed the judgment note for $9000.00 to Atwater. Johnson,who was not only treasurer of the corporation; but its financial manager, and who had organized both the old corporation, and its successor, the new one, swears that he had never heard until November 11 of Atwater as being interested in the debt due to Spaulding and Whittle. Potter, Spaulding and Whittle were a majority of the board of directors, who authorized the execution of the note to Atwater. Potter had an interest in consenting to the making of that note, because he was thereby released from his liability as guarantor, and Spaulding and Whittle sought to obtain an unlawful preference by the use of Atwater’s name. Atwater, who was himself a stockholder as well as a creditor, permitted his name to be used by these directors, one of whom was his confidential agent and friend, as a cover for the purpose of obtaining for them and for himself a fraudulent preference. A court of equity cannot allow him to reap advantage from such a transaction.

A stockholder, in making a contract of any kind with the corporation of. which he is a member, is in some sense dealing with a creature of which he is a part and holds a common interest with the other stockholders, who, with him, constitute the whole of that artificial entity, and is properly held to a larger measure of candor and good faith than if he were not a stockholder. (Twin Lick Oil Co. v. Marbury, 91 U. S. 587; Beach v. Miller, supra).

' Our statute provides that judgment may be confessed for “a debt bona fide due.” (2 Starr & Cur. Ann. Stat. page 1828, sec. 65). It follows that, if the judgment is in excess of the real debt so far as to interfere with the rights of other creditors, it is fraudulent and cannot stand. (1 Black on Judgts. sec. 69). Here, the judgment in favor of Atwater is for $9462.52, and the execution issued under it was levied upon the assets of Klemm & Company on November 26, 1887, before any other creditor had reduced his claim to judgment. If allowed to stand the Atwater judgment will exhaust all the assets of the corporation, and leave nothing for the other creditors. It is true, that, where the judgment debtor applies to a court of equity to set aside a judgment against him, equity will not necessarily grant relief as to the whole judgment, but may restrain the enforcement of such part as may be inequitable and allow it to be executed as to the residue. (2 Freeman on Judgts. sec. 516; Hale v. Bozeman, 60 Miss. 965; Booth v. Kesler, 6 Gratt. 350; Barrow v. Robichaux, 14 La. Ann. 203). But where a judgment is confessed, and execution levied for such an amount that subsequent judgment creditors find nothing to levy on, a combination between the parties having been proved, fraud will be established. (1 Black on Judgts. sec. 69; Nusbaum v. Louchheim, 1 Atl. Rep. 391). Such judgment is regarded as being confessed for the purpose of hindering, delaying or defrauding other creditors, and is void under the statute of frauds. (Nusbaum’s Appeal, 1 Atl. Rep. 392). A judgment may be founded upon an honest debt, and yet it, may be obtained under such circumstances and used for such purposes as to make it a fraud. Where such a judgment is entered up as a fraudulent cover to protect the defendant’s property from his other creditors, or to put it into the hands of creditors who have no right to appropriate it to their own debts, courts will deal with it as they would deal with any other fraudulent contrivance. If a creditor permits a judgment—rendered in his name for a large amount due to parties who have no right to the entry of such judgment in their favor—to be used for a fraudulent purpose as against subsequent creditors, he will be postponed until after they are paid, even though a portion of the debt embraced in the judgment, is honestly due to him. (Mech. Nat. Bank v. Burnet Manf. Co. 33 N. J. Eq. Rep. 486; 12 Am. & Eng. Enc. of Law, page 147a, note 5; Field v. Flanders, 40 Ill. 470; Carr v. Miner, 42 id. 179). As was said in the opinion delivered upon the former hearing: “Atwater’s debt was so blended with that of Spaulding and Whittle, the directors, and Ms dealings with the corporation were so far the dealings of Spaulding, that he must be held to occupy no better position than they do; Ms rights and theirs, we must presume, were voluntarily, on his part, put upon the same footing.”

The execution, issued upon the Atwater judgment, was levied upon the assets on November 26, 1887. The execution, issued upon the judgment of the Bank, was levied upon said assets on November 28, 1887, subject to Atwater’s levy. The Atwater judgment and execution being set aside, we are inclined to think, upon further consideration, that the execution of the Bank must take effect from the date of its levy, and that the judgment of the Bank is entitled to priority over the other creditors, whose judgments were subsequently rendered, or who obtained no judgments. This is in accordance with the doctrine of the case of Roseboom v. Whittaker, supra. There, a judgment by confession against an insolvent corporation was set aside as being fraudulent and void because it was rendered in favor of directors of the corporation ; and it was held, that certain attachment creditors, who had levied their writs of attachment subject to the execution issued upon the void judgment, were entitled to priority of lien as against the unsecured creditors. It was claimed there, as it is claimed here, that, upon the insolvency of the corporation, the assets became a trust fund for the payment of all the debts pro rata, but it was held, that the mere insolvency of the corporation could not have the effect of depriving creditors of their legal remedies, and that they had a right to sue at law and establish specific liens upon the property attached or seized on execution, provided they should do so before a court of equity acquired jurisdiction over the assets of the insolvent corporation for the purpose of administering upon them. When such jurisdiction attaches, it will become exclusive, and equity will administer the assets upon the principle that equality is equity. But legal rights and preferences, which are acquired before equity takes jurisdiction, will be respected in the distribution of the assets. Here, the executions of Atwater, and of the Bank, and of Harrington & Goodman, and of Victor D. Gowan & Co., were all levied before the original bill in this cause was filed, and, therefore, before a court of equity was asked to take the assets into its hands.

We do not regard the case of Beach v. Miller, supra, as conflicting with the doctrine thus announced in the case of Roseboom v. Whittaker, supra. In the Miller case judgment by confession was not rendered against the insolvent corporation in favor of a director who was also a creditor, but there the insolvent corporation transferred its property to Miller, one of its directors, in payment of a debt due to him, and he had actually taken possession of such property, when subsequent judgment creditors seized it upon their execution; and it was held that the creditors could not hold it, because it had passed beyond the reach of their execution and into Miller’s hands charged with a trusty which a court of equity might enforce in favor of all the creditors of the corporation. It was there said, however, that if the judgment creditors had levied on the property while in the hands of the corporation, and before it passed into the hands of Miller, they would, under such circumstances, have been entitled to hold it.

The point is made that the judgment note given to the American Exchange National Bank was executed by Klemm & Company by its treasurer, Johnson, and that the treasurer had no power under the by-laws to sign a power of attorney to confess judgment without express authority from the board of directors, and that such authority was never given to Johnson.

The evidence is clear, that Johnson was the business and financial manager of the corporation; that Klemm & Company deposited with said Bank, and borrowed money from it, and did business with it through Johnson; that Johnson was held out to the Bank as having the right to represent it; that the Bank had no notice of any by-law, which limited or restricted Johnson’s authority ; that the debt, for which the note was given, was a bond fide debt, due for money borrowed; that the money so borrowed was at once deposited in said Bank, and checked out in the ordinary course of business, and used to pay acceptances and bills of Klemm & Company; that the directors of Klemm & Company knew of the note given by Johnson to the Bank within less than a month after its execution, and did not repudiate it, or notify the Bank that it was made without authority, but continued to do business with the Bank as before, and at one of their meetings held on November 9, 1887, passed a resolution impliedly recognizing the binding force of the note. In the' light of these facts, the appellants, who are subsequent judgment creditors as between themselves and the Bank, can not be permitted to attack the judgment of the Bank upon the ground stated.

Where a note and warrant of attorney are executed in the name and under the seal of the corporation, it will be presumed that they were executed by the authority of the corporation. Even though, in such case, no resolution or vote of the board of directors is shown as authority for such execution, yet where the officer executing the note is the general manager of its financial business and makes the note in the ordinary course of business, it will be presumed that he was acting within the scope of his powers; and a stranger, dealing with him in good faith, on the faith of his apparent powers and without notice of facts showing, that his act was unauthorized, may hold the corporation liable. (McDonald v. Chisholm, 131 Ill. 273).

Even if the note was originally made without authority, we think that the facts show a ratification of it by the corporation. Where a principal, with knowledge of all the facts, adopts or acquiesces in the acts done under an assumed agency, he cannot be heard to afterwards impeach them under pretence that they were done without authority. Where a principal neglects to disavow such an act, he makes it his own. If an unauthorized act is done on behalf of a corporation, yet if the corporate authorities, having the right to object to the Act, knowingly acquiesce in it, it will be binding upon the corporation. (Morawetz on Priv. Corp. secs. 618, 630; Taylor on Priv. Corp. sec. 211).

As between the Bank and Klemm & Company an issue was made by the pleadings in the trial court, as to whether the power of attorney to confess the judgment was executed without authority or not. That issue was decided against Klemm & Company, and they have not appealed. The appellants here are attacking the judgment collaterally by their cross-bill in a court of equity, upon the ground that the treasurer had no authority to execute the warrant of attorney.' They do not charge the Bank with fraud, or that its judgment was collusively confessed without the existence of a bond fide indebtedness. The defect alleged amounts merely to a want of service of process. The remedy for such a defect is in the law court rendering the judgment, or by writ of error. A court of equity will not enj oin a judgment for such a defect and where it is not shown that the judgment is inequitable or unjust. (Burch v. West, 134 Ill. 258).

After the levy of the Bank’s execution and on November 28, 1887, executions were issued upon the judgments of Harrington & Goodman and Victor D. Gowan & Go. and placed in the hands of the sheriff. The liens of these executions came.next in order to that of the Bank, and, if any surplus were likely to remain after paying the judgment of the Bank, it should be applied upon these judgments. But there can be no surplus. At the date of the decree on August 7, 1890, the total amount in the hands of the receiver was only $3047.39, while the judgment in favor of the Bank was $3661.00 with interest at six per cent per annum from November 28, 1887, amounting altogether to more than $4000.00. It, therefore, makes no practical difference, so far as any of the appellants are concerned, whether the trial court erred or not in allowing $195.40 to the solicitor of complainants for disbursements made by him, and $500.00 to the receiver for services. If the $695.40 thus allowed were disallowed, it would not go to any of the appellants under the views here expressed, but would be applied upon the judgment of the Bank. Inasmuch, however, as the Bank does not complain of these allowances, and its counsel state in their brief that they submitted the matter of their allowance to. the trial court and are willing to abide by the decision of that court, we are not inclined to disturb the order providing for the payment of these amounts.

For the reasons here stated the judgment of the Appellate Court is reversed, and the decree of the Superior Court is affirmed.

Judgment reversed and decree affirmed.