Blair v. Illinois Steel Co.

31 L.R.A. 269, 159 Ill. 350

• Court: Illinois Supreme Court
• Decided: January 20, 1896
• Status: Published

Opinion

Mr. Justice Wilkin

delivered the opinion of the court:

In deciding this case upon the former hearing; after making the foregoing statement of facts, we said:

“This appeal brings before us so much of the order and judgment of the Appellate Court as affirms those portions of the decree rendered by the circuit court of Will county in the consolidated cause that have reference to the trust deed dated November 30, 1892.

“Appellants challenge the right of appellees, and especially that of the Illinois Steel Company, to question the validity of the trust deed, and also seem to call in question the jurisdiction and right of the court, under the pleadings and proofs, to decree the invalidity of such trust deed, and the relief that it granted. We do not deem it necessary to inquire whether or not the Cleveland Rolling Mill Company and the Illinois Steel Company, or either of them, had so exhausted their remedies at law as to entitle them, under their original bill, to set aside said trust deed in a court of chancery.

“Appellants answered said original bill, and then, on February 9, 1893, exhibited their cross-bill to foreclose the trust deed, and the Cleveland Rolling Mill Company, the Illinois Steel Company, Joseph S. Wiley, the Ashley Wire Company, and very numerous other persons, firms and corporations, were by appellants made parties defendant to the said cross-bill, and required to answer the same. This they did, and they interposed, by way of defense to the cross-suit, substantially the same matters that had been alleged in the original bill, and made substantially the same objections to the validity of the trust deed, and thereupon appellants filed a replication .to these answers, and the issues thus formed as to the validity of the trust deed were by the parties submitted to the decision of the chancellor at the hearing of the consolidated cause. We think that the circuit court, under the circumstances, had power and authority to adjudicate in respect to the matters thus submitted to it, and this even though all or some of the defendants to the cross-bill were but simple contract creditors of the Joliet Enterprise Company.

“But, even assuming that the question of the validity of the trust deed could not be raised in chancery, even by way of defense, by a creditor of the Enterprise Company without such creditor had first reduced his claim to a judgment and had exhausted all legal remedies for its collection, yet the record before us shows that the Cleveland Rolling Mill Company not only recovered a judgment at law for its demand of $17,464.67, and had an execution issued thereon on December 1, 1892, on which the sheriff, on December 24, 1892, endorsed a return of no property-found, but that said execution and return were on January 6, 1893, filed in the office of the clerk of the circuit court, and that the demands of the Ashley Wire Company and Joseph S. Wiley were reduced to judgments on January 23, 1893, and that no executions were issued on said judgments because all the property of the Joliet Enterprise Company then was, and for a long time had been, in the hands of a receiver and in the custody of the court.

“There may be some question as to the sufficiency of the return on the execution based on the judgment for $17,464.67, but there can be no question but that the Ashley Wire Company and Wiley had a clear right to contest the trust deed. When their judgments were recovered all the property of the Enterprise Company was in the custody of the law, in charge of the receiver in the consolidated suit, composed of the winding-up bill exhibited by the Will County National Bank and Stephen, and the subsequent bill of the rolling mill company and the steel company, and in that state of the case the issuance and attempted levy of executions would have been a vain arid idle ceremony, and probably a contempt of court. In Steere v. Hoagland, 39 Ill. 264, this court said that the general rule was, that there must be a judgment and a return of no property, before a creditor’s bill will be entertained, yet that to that rule there were well recognized exceptions, and the case of a deceased debtor was there held to be one of the exceptions, since under our statutes an execution cannot issue against an administrator so as to reach personal assets. The same principle has application in the case at bar. Where a debtor corporation is insolvent, and all its property is in the hands of a receiver in a suit in equity brought under section 25 of chapter 32 of the Revised Statutes for the purpose of dissolving and closing up the business of such corporation, the case is one of an exception to the general rule that there must be a return of nulla bona, upon which to base the right of a creditor to contest, in equity, a transfer of property made by the debtor.

“There can be no doubt but that the decree dismissing the cross-bill to foreclose was fully authorized by the issues formed therein, and to any question made as to the .authority of the court to grant the affirmative relief of decreeing the cancellation of the trust deed, it is a sufficient answer to say, that the Ashley Wire Company and Wiley not only interposed answers to the cross-bill to foreclose, but also each filed a cross-bill praying that the trust deed should be set aside and declared null and void, and that Wiley afterwards filed a supplemental bill of like tenor, and that appellants answered, and issues were formed upon such bills. In this state of the case it is hardly worth while to inquire whether or not it was proper practice to allow the filing of cross-bills to a cross-bill. It may be remarked, however, that the statute provides that any defendant may, after filing his answer, exhibit and file his cross-bill, and no good reason is perceived why defendants who are only brought into the suit by a cross-bill may not also exhibit cross-bills, where the same are necessary or proper for the purposes of doing complete justice and terminating the litigation.

“If we assume that the circuit court decided properly in decreeing the invalidity of the trust deed and in setting it aside, then such decree was for the beneft of the Illinois Steel Company and all other of the .general creditors of the Joliet Enterprise Company, as well as for the benefit of Wiley and the Ashley Wire Company. The property covered by the trust deed, and all other property of the insolvent corporation, was in the possession and control of the receiver appointed as well in the winding-up suit brought by the Will County Bank and Stephen, as in the suit of the Illinois Steel Company and others, that had been consolidated with it. The prayer of the winding-up bill was, that a decree should be entered dissolving the insolvent corporation, and for an accounting of all such matters wherein an account was necessary, and for the appointment of a receiver, under the statute, with authority to close up its affairs, and for such further and other relief in the premises as should be agreeable to equity and good conscience. The whole consolidated cause was submitted to the court,—the two original bills and the various cross-bills,—and the issues formed on such bills, and when the court decreed upon one branch of the consolidated cause that the trust deed should be set aside as to the insolvent corporation and its creditors, then the proceeds of the property covered by said deed, as well as the proceeds of all other property of the insolvent corporation, was properly decreed, after the payment of the several parties found to be entitled to priorities, to be paid pro rata to Joseph Stephen, the Will County National Bank, Joseph S. Wiley, the Ashley Wire Company, the Illinois Steel Company, the numerous other creditors named in the decree who were parties to the consolidated cause, and all other creditors of the Enterprise Company proving their claims.

“When a- court of equity acquires jurisdiction over the assets of an insolvent corporation for the purpose of administering upon them, it will administer the assets upon the principle that equality is equity, and will distribute such assets ratably among all the creditors, paying due regard' however, to legal rights and preferences existing before it takes jurisdiction. (Atwater v. American Exchange Nat. Bank, 152 Ill. 605; Butler Paper Co. v. Robbins, 151 id. 588.) Here the jurisdiction of the court of chancery attached on December 10, 1892, when suit in equity was brought, under the statute, for the purpose- of dissolving the Joliet Enterprise Company and closing up the business of said corporation. The subsequent filing, in the same court, of a creditors’ bill, and of cross-bills in the nature of creditors’ bills, and of answers to the cross-bill to foreclose the trust deed, did not have the effect of giving to some of the creditors preference over the other creditors; nor, indeed, do we understand that such a claim is made in behalf of any of the creditors. The principal controversy upon this appeal is whether or not the Joliet Enterprise Company had the right to make the preferences that it did by the trust deed of November 30, 1892, executed to the appellant Blair, trustee.

“We have held in numerous cases than an insolvent corporation, as well as an insolvent natural person, has the right, in the absence of a fraudulent intent, to make preferences among creditors. (Reichwald v. Commercial Hotel Co. 106 Ill. 439; Bouton v. Smith, 113 id. 481; Burch v. West, 134 id. 258; Ragland v. McFall, 137 id. 81; Glover v. Lee, 140 id. 102; Warren v. First Nat. Bank, 149 id. 9; Butler Paper Co. v. Robbins, 151 id. 588; Gottlieb v. Miller, 154 id. 44.) Such preference may even be given to the wife or a relative of directors or officers of the corporation, provided no pecuniary advantage is thereby obtained by such directors or officers. (Ragland v. McFall, supra; Gottlieb v. Miller, supra; Schroeder v. Walsh, 120 Ill. 403.) Therefore, in the case at bar, the court properly held that the fact that Cornelia A. Miller was an aunt of three of the directors of the insolvent company did not vitiate the preference given to the debt due her. * * *

“It is assigned as error that the Appellate Court erred in holding that the circuit court had power, even by consent of counsel, to order the lands, premises and plant of the Joliet Enterprise Company to be sold without redemption, and to direct the receiver of said corporation to execute and deliver deeds of conveyance to the purchaser thereof upon the confirmation of said sale, without reserving any right of redemption. In our opinion, the decision in Locey Coal Mines v. Chicago, etc. Coal Co. 131 Ill. 9, does not control in this case. The decision there made was based on the statute, which expressly makes subject to the right of redemption all sales of real estate made ‘by virtue of an execution, judgment or decree of foreclosure of a mortgage, or the enforcement of a mechanic’s lien or vendor’s lien, or for the payment of money.’ The sale there involved was one ordered in a decree rendered upon a creditor’s bill to enforce the collection of a judgment at law, and it was considered that the decree was one ‘for the payment of money,’ viz., the amount due on the complainant’s judgment, and also considered that the creditor’s bill was to be regarded as a species of process for the execution and enforcement of a judgment at law. Here there was no decree of foreclosure and sale under the trust deed, even in favor of Mrs. Miller. The payment of the small amount remaining due and unpaid upon the debt secured to her, was, by agreement of parties, otherwise provided for. Nor was any decree of sale rendered upon the creditors’ bills, or cross-bills of either the Illinois Steel Company, the Cleveland Rolling Mill Company, the Ashley Wire Company or Joseph S. Wiley, giving them, or either of them, preference over the other and general creditors. The only effect accomplished by said bills and cross-bills, and by the answers to the cross-bill to enforce the trust deed, was to set aside said trust deed as a preference, and leave the real estate and plant as an asset in the hands of the receiver, wholly unincumbered thereby.

“The decree for the sale of the real estate of the Joliet Enterprise Company, to be made by the receiver without redemption, was manifestly based upon the winding-up bill and the statute that provides for the dissolution and winding up of insolvent corporations.

“We think that the statute upon which the decision in Locey Goal Mines v. Coal Co. supra, was based, has no application to the matter of a decree for the sale of real estate ordered to be made by the receiver in a suit in equity brought under our winding-up statute for the purpose of dissolving an insolvent corporation and closing up its business and affairs. The decree for a sale without redemption was the proper decree to be entered.”

That part of the decree of the circuit court which dismissed the bill of these appellants was then affirmed, on the ground that the trust deed was, as to them, for the benefit of those directors of the corporation who had guaranteed the payment of the notes secured by it, and therefore made in violation of the rule that the directors and other agents of an insolvent corporation cannot give themselves any advantage or preference in payment of claims due them by the corporation at the expense of other creditors. The correctness of this position is the only' question before us upon this rehearing, and we are satisfied, upon a further consideration of the case, that the position there taken cannot be maintained.

That a corporation, although insolvent, can prefer creditors not officers of the company has been too long and firmly established by the decisions of this court to be now the subject of controversy. We said in Warren v. First Nat. Bank of Columbus, 149 Ill. 9: “The doctrine is recognized here that the property of an insolvent corporation is a trust fund, in such sense as precludes the directors and officers of the corporation from dealing with it in such manner as to secure preferences for themselves. (Roseboom v. Whittaker, 132 Ill. 81; Beach v. Miller, 130 id. 162.) But we have not gone so far as to hold that the mere insolvency of a corporation eo instanti deprives the directors and officers of the power to dispose of the corporate property, in good faith, by way of paying or securing corporate debts, even though the result may be to give certain creditors a preference over others.” The rulé laid down in Cook on Corporations is: “Corporations, unless restricted by their charters or by general statutes, may make assignments for the benefit of creditors to the same extent that individuals may. In making the assignment the corporation may make preferences for one or more creditors over others or of one class of creditors over other classes.” In the case of Warren v. First Nat. Bank of Columbus, supra; this rule was held to be in harmony with our decisions in Reichwald v. Commercial Hotel Co. 106 Ill. 439, Ragland v. McFall, 137 id. 181, and Glover v. Lee, 140 id. 102. To the same effect is Gottlieb v. Miller, 154 Ill. 44, where it is said (p. 53): “That the doctrine that we have so frequently held and that we are here so strenuously urged to change or modify,—that in the absence of legislation an insolvent corporation may make a preference among creditors, subject to the same restrictions that apply to individual debtors,-—is in accord with the great weight of authority, is indicated by the following list of cases in which like doctrine is announced,”— citing a long list of authorities. So we hold in this case, that the preference given by this trust deed to Mrs. Cornelia A. Miller was not unlawful, she being merely a creditor of the corporation, having no indorsement or guaranty from' its directors. That the Merchant’s National Bank of Chicago, the American Trust and Savings Bank of Chicago, the Third National Bank of New York, the Will County National Bank, the First National Bank of Joliet and the Washburn & Moen Manufacturing Company, whose claims were secured by the trust deed, were all bona fide creditors of the insolvent corporation is not questioned. That they were guilty of any fraud or misconduct which would deprive them of the same rights accorded to Mrs. Miller or any other bona fide creditor is not claimed. Therefore the grounds, and only grounds, upon which it is contended or can be held that they were not entitled to be preferred as creditors of the corporation is, that certain directors of the corporation had guaranteed the payment of their debts. If it is a sufficient reason for depriving them of that right, it must be upon the theory that otherwise the preference would result in some benefit to the guarantors, directors of the company, and that, too, without any proof tending to establish that fact,—that is to say, there is no affirmative proof in this record that these guarantors are solvent or can be made to respond to these creditors for any balance which may remain due them after the company assets are exhausted. For anything here appearing, if the contention that because the creditors had the names of the directors upon their notes as guarantors deprives them of the right secured to other creditors to be preferred be maintained, they must suffer loss merely because they had such guaranty. We do not understand that the rule which authorizes an insolvent corporation to give preference to one or more of its creditors, or a class of creditors, in the distribution of its assets, to the exclusion of others, is limited by the mere fact that such preference may, in a certain contingency, result in benefit to directors of the company, and the authorities, so far as we have been able to ascertain, are to the contrary. While it is not so decided, in terms, in the case of Sanford Fork and Tool Co. v. Howe, Brown & Co. 157 U. S. 312, it is inferentially so held. Justice Brewer, in rendering the opinion of. the court, puts these questions: “Would it be doubted that if this mortgage had been given directly to the holders of these notes it would have been valid? Are creditors who are neither stockholders nor directors, but strangers to the corporation, disabled from taking security from the corporation by reason of the fact that upon the paper they hold there is also the indorsement of certain of the directors or stockholders? Must, as a matter of law, such creditors be content to share equally with the other creditors of the corporation, because, forsooth, they have also the guaranty of some of the directors or stockholders, whose guaranty may or may not be worth anything?” The case of Henderson v. Indiana Trust Co. 40 N. W. Rep. (Ind.) 517, involves the decision of this very question, and it is there held, as stated in the syllabus of the case: “An insolvent corporation, while in possession of its property, may prefer any of its creditors not directors or stockholders, even though their claims are secured by the indorsement of directors and stockholders, where the creditors were, at the time of the preference, unaware of its insolvency, or that the transfer was made to protect such directors and stockholders.”

But it is unnecessary to further pursue this inquiry. We do not understand counsel for appellee to seriously question the correctness of the position that the mere fact that the directors of the company had guaranteed the payment of the debt would not be an insuperable objection to the creditor availing himself of a preference made in his favor. They say: “The case at bar is very different from the cases cited in the two petitions for a rehearing, and the difference is just this: that in these cases, such as Henderson v. Indiana Trust Co. supra, the creditor, who was preferred, exercised diligence for his own protection; in the present case the preference was a gift, pure and simple, voluntary on the part of the directors and unsought by the donees. It is not claimed on behalf of the steel company that creditors who have secured the guaranty of directors of the corporation are by that fact always and necessarily prevented from obtaining a preference when the corporation becomes insolvent. If the corporation fails, all creditors are entitled to exercise the highest diligence in their behalf, and when that diligence has been exercised, it maybe that they are entitled to the fruits of it, whether they had the guaranty of creditors or not.” The right of these beneficiaries to a preference is thus made to depend upon the exercise of diligence on their part to obtain the preference, and not merely upon the fact that they had the guaranty of certain directors upon their paper. It is true that the circuit court found, as shown in the foregoing statement of facts, “that neither the trustee nor any beneficiary knew of the execution and recording of the trust deed until after it was executed and recorded by the officers of the corporation.” That finding of fact, it will be seen, applied to Mrs. Cornelia A. Miller as well as to the other beneficiarles in that deed, and yet it is not pretended that her right to a preference depended upon any act of diligence upon her part. Why, then, in the absence of proof tending to show that this preference to the other creditors was not for their benefit but for the benefit of the directors, should the question of diligence cut any figure in the case?

We assume that it will not be seriously contended that the right of an insolvent individual or corporation to prefer creditors is in anywise conditioned upon the act of the creditor.. The right to prefer a creditor rests upon the principle,that so long as the debtor retains control and dominion over his property he may do with it as he-' sees fit, and discharge one obligation to the exclusion of another, presumably upon the theory that he regards the claim of one debtor more meritorious than another. In our view of the case, the fact that the trust deed was executed without the knowledge of the creditors, or without their having insisted upon its execution, is wholly immaterial, unless it can be said that that fact, of itself, is sufficient to justify the conclusion that it was executed for the benefit of the directors or guarantors upon the note and not for the benefit of the creditors themselves, —and this certainly cannot be claimed. This trust deed conferred a direct benefit upon the creditors, by way of preference. That it might result in benefit to the guarantors or directors is a mere inference or conjecture.

We think the decree of the court below in dismissing the cross-bill of appellants was erroneous and should be reversed. The cause will be remanded, with instructions to it to enter a decree in conformity with the prayer of that bill. Reversed and remanded.

Mr. Justice Cartwright

took no part in the consideration of the case in this court.