Bosworth v. Jacksonville Nat. Bank

64 F. 615, 12 C.C.A. 331, 1894 U.S. App. LEXIS 2528

• Court: Court of Appeals for the Seventh Circuit
• Decided: November 27, 1894
• Docket: No. 176
• Status: Published

Opinion

BUNN, District Judge

(after stating the facts as above). 1. We are of opinion that this case is controlled by the-decision of the supreme court of the United States in Mandeville v. Welsh, 5 Wheat. 277. Justice Story in that opinion says:

“It is said that k bill of exchange is, in theory, an assignment to the payee of a debt due from the drawee to the drawer. This is undoubtedly true where the bill has been accepted, whether it be drawn on general funds or a specific fund, and whether the bill be, in its own nature, negotiable or not; for, in such a ease, the acceptor, by his assent, binds and appropriates the funds for the use of the payee. * * * In cases, also, where an order is drawn for the whole of a particular fund, it amounts to an equitable assignment of that fund, and, after notice to the drawee, it binds the fund in his hands. But where the order is drawn, either on a general or a particular fund, for a part only, it does not amount to an assignment of that part, or give a lien, as against the drawee, unless he consent to the appropriation, by an acceptance of the draft, or an obligation to accept may be fairly implied from the custom of trade, or the course of business between the parties, as a part of their contract. The reason of this principle is plain. A creditor shall not be permitted to split up a single cause of action into many actions without the assent of the debtor, since it may subject him to many embarrassments and responsibilities not contemplated in his original contract. He has a right to stand upon the singleness of his original contract, and to decline any legal or equitable assignments by which it may be broken into fragments. When he undertakes to pay an integral sum to his creditor, it is no part of his contract that he should be obliged to pay in fractions to any other persons. So that, if the plaintiff could show a partial assignment to the extent of the bills, it would not avail him in support of the present suit.”

The case, also, of Palmer v. Merrill, 6 Cush. 282, opinion by Chief Justice Shaw, is very much in point, wherein it was held that an assignment, for a good consideration, from the assured, in a life policy, by an indorsement in writing thereon, of part of the sum assured thereby, notice of which is given to the insurers, but the policy retained in the hands of the assignor, does not transfer to the assignee such an interest in the policy as will entitle him, if the estate of the assured proves insolvent, to recover the whole suni assigned to bim of the assured's administrator, who has received the whole amount of the policy from the insurers. This case is quite analogous to the one at bar. The receivers stand in the place of the administrator in the Massachusetts case, and represent, not only an insolvent debtor, but all of its creditors as well, whose rights attached to the fund upon their appointment, and before any appropriation of the portion thereof represented by the drafts had been effected by presentation or acceptance, and even before the fund became due and payable by agreement of the railway companies. It appears from the record, not only that the bank omitted to give the drawee notice of its claim to part of the fund, but received the drafts with knowledge that the fund would not accrue or be available until Sep-ieiuber 25. 180-'!. which was four days after (ho appointment of the receivers; and (lie only notice that wag given by ¡he bank, which was by the presentation of the drafts-for payment, was also after the receivers had been appointed, and had notified the drawee of their appointment, and claimed the fund. The decree appointing the receivers clothed them with all the property rights of the company, “together with all tolls, rents, incomes, franchises, issues, and profits, and generally with all the authority and rights usually given to receivers by a court of equity.” It is nowhere claimed or asserted that 1he drawee, prior to the receivership, accepted the drafts, or had notice of their existence, and it would seem that the transaction was treated by the bank as incomplete and. unexecuted until the freight balance should be determined upon by the railway company, the drawee. In the meantime, as seems entirely just and equitable, the right of the receivers and the general creditors, whom they represented, had attached to the fund, in preference to that of the creditor who was seeking a preference after the company had become insolvent and its affairs put into course of liquidation.

The following remarks of Chief Justice Shaw in the case last referred to lay down the correct doctrine:

“According to the modern decisions, courts of law recognize the assignment, of a chose in action, so far as to vest an equitable interest in the assignee, and authorize him to bring an action in the name of the assignor, and recover a judgment for his own benefit. But, in order to constitute such an assignment, two things must concur: first, the party holding the chose in action must, by some significant act, express his intention that the assignee shall have the debt or right in question, and, according to the nature and circumstances of the case, deliver to the assignee, or to some person for his use, the security, if there be one, bond, deed, note, or written agreement, upon which the debt or chose in action arises; and, secondly, the transfer shall be of the whole and entire debt or obligation in which the chose in action consists, and as far as practicable place the assignee in the condition of the as-' signor, so as to enable the assignee to recover the full debt due, and to give a good and valid discharge to the party liable.”

And the same rule holds in equity. Indeed, the entire doctrine of assignments of dioses in action is one growing out of equity jurisprudence, and founded upon equitable considerations, as by common law the legal title to a chose in action could not be passed by assignment; and still, according to the generally accepted doctrine, they are only assignable so far as to vest in the assignee an equitable Interest The doctrine of the above cases was fully recognized and enforced by the supreme court of Illinois in Railway Co. v. Nichols, 57 Ill. 464.

2. As it appears from the record that by the note to the bank for $10,000, of July 25, 1893, William S. Hook, who was president and director of the railway company, bound himself as surety for the payment of the note, the railway company, being in failing circumstances, and already, when the drafts were drawn, a party to proceedings which placed it in the hands of a receiver, could not give a preference to one who, as an officer and member of the corporation, stood in a relation of trust toward the general creditors. It is insisted that the property of an insolvent corporation is a trust fund in such a sense as to preclude the directors and officers of the corporation from dealing with it in such a manner as to secure preferences for themselves. And this is undoubtedly the general doctrine, and the doctrine in Illinois. See Beach v. Miller, 130 Ill. 162, 22 N. E. 464; Roseboom v. Whittaker, 132 Ill. 81, 23 N. E. 339; Cook, Corp. § 691.

In a recent case decided by this court (Sutton Manuf’g Co. v. Hutchinson, 63 Fed. 496, opinion by Mr. Justice Harlan), the doctrine is thus summed up:

“It is, we think, the result of the eases that when a private corporation is dissolved, or becomes insolvent and determines to discontinue the prosecution of business, its property is thereafter affected by an equitable lien or trust for the benefit of creditors. The duty in such cases of preserving it for creditors rests upon the directors or officers to whom has been committed the authority to control and manage its affairs. Although such directors and officers are not technical trustees, they hold, in respect of the property under their control, a fiduciary relation to creditors; and, necessarily, in the disposition of the property of an insolvent corporation, all creditors are equal in right, unless preference or priority has been legally given by statute or by the act of the corporation to particular creditors. In what cases, where the subject is. uncontrolled by legislation, can such preference of priority be legally given by a corporation? Undoubtedly a solvent corporation, if not forbidden by its charter, may mortgage its property to secure the performance of obligations assumed before or at the time of the execution of the mortgage. So, a mortgage executed by a corporation whose debts exceed its assets, to secure a liability incurred by it or on its behalf, will be sustained if it appears to have been given in good faith to keep the corporation upon its feet, and' enable it to continue the prosecution of its business. A corporation is not required by any duty it owes to creditors to suspend operations the moment it becomes financially embarrassed, or because it may be doubtful whether the objects of its creation can be attained by further effort upon its part. It is in the line of right and of duty, when attempting, in good faith, by the exercise of its lawful powers and by the use of all legitimate means, to preserve its active existence, and thereby accomplish the objects for which it was created. In such a crisis in its affairs, and to those ends, it may accept financial assistance from one of its directors, and by a mortgage upon its property secure the payment of money then loaned or advanced by him, or in that mode protect him against liability then incurred in its behalf by him. Of course, in cases of that kind a- court of équity will closely scrutinize the transaction, and, in a contest between general creditors and a director or managing officer who takes a mortgage upon its property, will hold the latter to clear proof that the mortgage was executed in good faith, and was not a device to enable him to obtain an advantage for himself over those interested in the distribution of the mortgagor’s property: Richardson’s Ex’r v. Green, 133 U. S. 30, 43, 10 Sup. Ct. 280; Oil Co. v. Marbury, 91 U. S. 587, 588.

“Entirely different considerations come into view when an insolvent corporation having no expectation of continuing its business, and recognizing its financial embarrassments as too serious to be overcome, mortgages its property ito secure a debt previously incurred to one of its directors, or, in a general assignment of all of its property, gives him a preference. To a general assignment by a private corporation for the equal benefit of all its creditors, including directors, no objection could be made, because it recognizes the equal right of creditors to participate in the distribution of the common fund. Such an assignment, Lord Ellenborough said, in Pickstock v. Lyster, 3 Maule & S. 371, is to be referred to an act of duty rather than of fraud, and is an act by the assignor that arises out of a discharge of the moral duties attached to his character of debtor to make the fund available for the whole body of creditors. The contention of the defendants is that, in disposing of their respective properties, an individual and a corporation were recognized at common law as having equal rights; and as the former may, in the absence of a statute forbidding it, transfer the whole or part of his property willi tile intention or with the effect of giving a preference to some of Ms creditors, to the exclusión of others, so an insolvent corporation, when iiimn-cially embarrassed and not intending to concinue its business, may malte a preference among its creditors, whoever they may be, and whatever their relation to the corporation or to the property transferred. If this be a sound rule, it would follow that directors, being also creditors, of an insolvent corporation which has abandoned the objects of its creation, and coast'd an active existence, may distribute among themselves its entire assets, if the reasonable value thereof does not. exceed their aggregate demands. We cannot accept tins view. In our judgment, when a corporation becomes insolvent. and intends not to prosecute its business, or does not. expect to make fun,Iter effort, to accomplish the objects of its creation, its managing officers or directors come under a duty to distribute its property or its proceeds ratably among all creditors, having regard, of course, to valid liens or charges preciously placed upon It. Their duty is ‘to act up to the end or design’ for which the corporation was created (1 III. Comm. 480); and when they can no longer do so their function is to hold or distribute the property in their hands for the eipial benefit of those entitled to it. Because of tlio existence of this duty in respect to a common fund in their hands to bo administered, the law will not permit, them, although creditors, to obtain any peculiar advantage' for themselves to the prejudice of other «'editors. This rule is imperatively demanded by the principle that one who has the possession and coutrol of property for the benefit of outers — and surely an insolvent corporation, which has ceased to do business, holds its property for the benefit of creditors- may not dispose of it for his own special advantage to the injury of an.v of those for whom it as held. That principle pervades the entire law regulating the conduct of those who hold fiduciary relations to others, and. instead of being relaxed, should be rigidly enforced in oases of breach of duty or Bust by corporate managers seeking to enrich themselves at the ox pense of ill >xe who have an interest equally with themselves in the property committed by law to their control. It would be difficult to overstate die mischievous results of a contrary' rulo as applied to those intrusted with the management of corporate property."

Tita! the Chicago, Peoria & St. Louis Railway Company was insolvent when tin' drafts were drawn, on September 12, 1893, can hardly admit of question. Since July 10, 1893, a suit had been pending' against the company, brought by Cavett, receiver of the SI;. Louis & Chicago Railway, alleging' default in performance of covenants in I he lease, and asking a surrender of the same. On the 12th of Sepiember, the very day tint drafts were drawn. Cavett, receiver, lilt'd an amended petition against the Chicago, Peoria & St. Louis Railway Company-. William S. Hook, and Marcus Hook, alleging an indebtedness of $7.1,000 to the petitioner, and also alleging indebtedness to many other railroads, corporations, and individuals, and. among the rest, default: in the bonded indebtedness of the defendant company, and asking the appointment of a receiver, and the case was set for hearing on September 21st. On that, day. September - 1st. the Mercantile Trust Company began the suit for foreclosure upon the bonds of the company for default in 1lie payment of the interest thereby secured falling due on the 1st day of September, 1,893. On the same day of the filing of this bill, September 21st, receivers were1 appointed for tin' railway company, who, on the morning of September 22d, took possession of the road.

it would he difficult to distinguish this case upon principle from that of 1lie Sutton Manufacturing Company, quoted from as above. There is this difference: that William S. Hook, at the time of the drawing of the draffs, Wits not a creditor of the railway company for the amount of its indebtedness to tbe bank. He was merely surety for tbe payment of tbe note. Tbe money was advanced by tbe bank to tbe company, and used in its business. Tbe bank, therefore, was primarily tbe creditor. William S. Hook could only be considered tbe creditor, in respect to tbe money represented by tbe note, after be should pay tbe note as surety for tbe railway company, and become subrogated in tbe place of tbe bank in respect to the indebtedness. But it seems pretty clear that this difference in Mr. Hook’s relation to tbe railway company, as compared to that of a creditor proper, would make no difference in tbe application of tbe rulé in regard to giving preferences. This was so adjudged in Lippincott v. Carriage Co., 25 Fed. 577, and in Howe v. Tool Co., 44 Fed. 231, both decided by Judge Woods, and referred to with entire approval in Sutton Manuf’g Co. v. Hutchinson, supra. Tbe intention to make tbe preference and tbe motive are manifest from tbe record. The note did not fall due until September 26th. On September 11 tb, $2,500 was paid, and indorsed upon it. These drafts for $7,500 were drawn on tbe next day, September 12th, two weeks before tbe note would become due, against a fund not yet due, and of a then uncertain amount. There is no reason appearing for singling out this particular debt for such prompt payment except to favor William S. Hook, president, who bad signed as a joint and several maker, but who, as between him and tbe railway company, wras surety for the payment of tbe debt. Was William S. Hook, in preferring the bank, gaining any peculiar advantage to himself to tbe prejudice of other creditors? We think this question admits of but one answer. Tbe advantage be would gain to himself by such preference would be tbe cancellation' of bis own obligation to tbe bank for tbe debt, which cancellation would forestall bis becoming the creditor of an insolvent corporation. Being surety upon tbe note to -the bank, and liable to be called upon to pay tbe same, as one of tbe makers, when due, be would have the same motive, in case of insolvency or threatened insolvency of the company, to prefer tbe bank as a creditor, as be would to prefer himself as a creditor. There would be tbe same temptation to fraud and unfair dealing in tbe one case as in tbe other.

And upon tbe whole case we must bold that the preference thus sought to be made of this particular creditor, on tbe very day of tbe filing of tbe amended petition praying for tbe appointment of a receiver, and after default made in tbe payment of interest upon tbe bonded indebtedness of tbe railway company, was an unlawful preference; and, upon both grounds discussed in this opinion, tbe decree of tbe court below is reversed, and tbe cause remanded, with directions to enter a decree in favor of tbe appellants.