Chicago & Atchison Bridge Co. v. Fowler

55 Kan. 17

Opinion

The opinion of the court was delivered by

Joi-iNSTON, J. :

7. £oacema'le~ Several questions are presented upon a preliminary motion to dismiss the proceeding in error. One ground of the motion is that the case-made is invalid, having been allowed without notice. By the terms of the order the case was to be settled and signed on three days’ notice, and it appears that after it was duly served it was presented to the judge, who settled and signed the same without notice to the defendant. Afterward, and before the expiration of the year, a notice was served-that on a certain day the case would be presented for allowance, and upon that day the case was presented, amendments thereto were suggested by the defendant, and without any objection the case was duly settled and signed. The first attempt of the judge to settle the case was a nullity for want of notice to the defendant. The case-made was duly served, notice was duly given, an(i the case-made was settled within the time allowed by law. The void effort to settle did not tie the hands of the judge nor prevent him from performing the duty which the law requires. Another ground of the motion is, that George Fowler having died since this proceeding was begun, and as it has not been revived against his heirs at law or de-visees, the proceeding abates by force of the statute. Soon after the death of the defendant, the proceeding was revived by stipulation against the executor and trustees of the last will and testament of George Fowler, deceased. The action taken appears to have been sufficient as against the personal representatives of the deceased, but it is contended that, as the action is brought to enforce a trust in real estate in which the deceased, had an interest, the action survived only as against the heirs and devisees of the deceased, and not against the personal representatives. If the sole purpose of the action had been to subject real estate to the payment of the judgment, and to decree a sale of the land in satisfaction of the judgment, there would be considerable force in the contention of the defendant; but as' the plaintiff asked and, as we shall hereafter see, was entitled to recover a personal judgment, it was proper that the revivor should be made against the personal representatives of the deceased. The final ground urged for dismissal is that there is a defect of parties. It is contended that several parties who were named as defendants in the petition were necessary to a review of the proceedings in this court. If a joint judgment had been rendered for or against them, or if the judgment rendered could not be reversed or modified without affecting them all, then it would be necessary that all of them should be made parties to this proceeding; but the judgment sought to be reviewed was against the bridge company and in favor of George Fowler alone. It does not appear that service was made upon any of the other defendants who were named in the petition, and their rights were not determined in the action. Their absence, as we shall see later on, did not prevent the court from enforcing the personal liability of'George Fowler, and as no judgment for or against them was rendered in the court below, and as they are not to be affected by this proceeding, they are not necessary parties here.

The plaintiff insists that upon the merits it should have been awarded judgment against George Fowler for the full amount of its claim. Of the validity of the debt and judgment held by the bridge company there is no question. When the debt accrued, the packing company was a going concern, operating packing-houses at Chicago, Kansas City, and at Winthrop, near to the city of Atchison. The company was organized in 1878, under the laws of Illinois, and George Fowler was one of the promoter^ and also a director of the corporation during a great part of the time it was engaged in business. As the agreed facts show, the Fowlers w'ere the sole stockholders, and had absolute control of the corporation. The members of the corporation were also members of the partnership 'of Fowler Bros., and George FoAvler was a manager of one of the packing-houses while it was in operation. In 1884, the Fowlers entered into an agreement with each other to wind up the business and distribute among themselves the entire assets of the corporation. Although the capital stock of the corporation was only $150,000, the members of the company had at that time assumed an indebtedness of more than $2,000,000, and the statutes of Illinois, under one of which the company was organized, provided that “if the indebtedness of any stock corporation shall exceed the amount of the capital stock, the directors and officers of such corporation assenting thereto shall be personally and individually liable for such excess to 'the creditors of such corporation.” (Law of 1871-’72, §16, p. 800.)

1. Insolvent preferences directors0tor t?SStng property. It appears that the greater part of the indebtedness of tlie company was due to the Fowlers, but before they divided the assets among themselves the debt of the bridge company had accrued. While there is no specific statement that the company was insolvent when the transfer of the property was made in 1884, it is shown that when the assets were distributed in accordance with the agreement then made, there still remained an unpaid debt of more than $200,000. By that agreement the officers and stockholders of the company divided its entire capital and assets, and in that way deprived it of all facilities to carry on business or to exercise the functions of a corporation. The company being in such a conditiqn, the action of its officers and stockholders in absorbing the entire assets of the company and dividing them among themselves operated as a wrong as against the excluded creditors. In its disabled condition, and the assets being insufficient to meet the liabilities of the company, its property became a trust fund for the payment of its debts. In equity the cred-^01'3 have a lien upon the property superior 1° the claim of any of the stockholders and they are entitled to follow it into the hands of anyone who has notice of the trust. If it has been taken by one who is chargeable with notice of the condition of the corporation and of the purposes of the officers and stockholders who propose wrongfully to withdraw the capital and divide and distribute the assets, he will be held to be a trustee and made to account to the creditors to the extent of the property so misapplied. By the agreement made May 1, 1884, the Fowlers not only proceeded to wind up the business of the corporation but also to dissolve the partnership firm of Fowler Bros. As has been seen, the Fowlers who were members of the corporation were also members of the firm to whom the corporation owed the principal part of the indebtedness. In effect the agreement was to transfer the property to themselves. George Fowler, although not a director at the time of the transfer, had been such, and was at that time a stockholder of the company. He was also a member of the firm of Fowler Bros., and was therefore cognizant of the facts which would invalidate the transaction, and must have known that the members of the corporation were dividing the whole assets of the same among themselves, without paying or making adequate provision for the debt of the bridge company. It is true that in the agreement it was provided that when the property at Winthrop should be sold, the assets and liabilities affecting the same should be discharged; but this property and its proceeds were retained within the control of the Fowlers, and they have never paid the debt, nor have they made any adequate provision for its payment from that or any other of the resources of the company. There was conveyed to George Fowler from the assets of the company property of the value of $580,000. It is stipulated that he gave this amount in cash and notes to his brothers, but the money and notes were not given to the company, but were actually paid over to Fowler Bros., of which firm George Fowler was a member. He was the manager of the packing-house when the debt to the bridge company accrued, and has resisted the same from the outset. He knew of the relationship which existed between the members of the company and the members of the firm. He was acquainted with the fact that the directors had without authority contracted debts far in excess of the capital stock, and that these directors, who were members of the firm of Fowler Bros., had made themselves liable for this excess of indebtedness to the extent of about $1,850,000. He knew that his associates had no authority to make a contract with themselves, nor to make a disposition of the assets which would exclude the creditors from a share of the assets. Those who conducted the negotiations by which the assets of. the corporation were absorbed controlled both sides of the agreement, and the effect of the negotiations was a transfer of the assets to them individually.

“The law will not permit them to manage the affairs of the corporation for their personal and private advantage when their duty would require them to work for and use reasonable efforts for the general interests of the corporation and its stockholders and creditors.” (Ryan v. Railway Co., 21 Kas. 398.)

In the same case it is held that if persons other than the directors and officers of the corporation participated with them in their illegal transactions with knowledge of all the facts, equity will hold them to their just responsibilities, following the trust property into the hands of remote grantees and purchasers who take it with notice of the trust in order to subject it to the trust. Under the facts George Fowler cannot be regarded as a bona fide purchaser of the property, but having had full knowledge of all the facts he is equally liable with the officers who made the wrongful transfer.

“ Equity regards the property of a corporation as held in trust for the payment of the debts of the corporation, and recognizes the right of creditors to pursue it into whosoever possession it may be transferred, unless it has passed into the hands of a bona fide purchaser. . . . Assets derived from the sale of the capital stock of the corporation, or of its property, become, as respects creditors, the substitutes for the things sold, and as such they are subject to the same liabilities and restrictions as the things sold were before the sale and while they remained in the possession of the corporation. Even the sale.of the entire capital stock of the company and the division of the proceeds of the sale among the stockholders will not defeat the trust nor impair the remedy of the creditors if any debts remain unpaid, as the creditors in that event may pursue the consideration of the sale in the hands of the respective stockholders, and compel each one, to the extent of the fund, to contribute pro rata toward the payment of.their debts out of the moneys so received and in their hands. Moneys derived from the sale and transfer of the franchises and capital stock of an incorporated company are assets of the corporation, and as such constitute a fund for the payment of its debts, and if held by the corporation itself and so invested as to be subject to legal process, the fund may be levied on by such process; but if the fund has been distributed among the stockholders or passed into the hands of other than bona fide creditors or purchasers, leaving any debts of the corporation unpaid, the established rule in equity is that such holders take the fund charged with the trust in favor of creditors, which a court of equity will enforce, and compel the application of the same to the satisfaction of their debts.” (Railway Co. v. Howard, 74 U. S. 409, and cases cited.)

In Bradley v. Farwell, 1 Holmes, 433, it is said that—

"The fiduciary relation between the directors and the creditors being established, and the fact that the trustees in dealing with the trust fund have secured to themselves a benefit or'advantage over the creditors, or a benefit or advantage to themselves as creditors over and above the other creditors, taints the transaction and invokes the aid of a court of equity to see to the right execution of the trust. Not that the trustees cannot prefer one creditor to the others at common law and outside of the provisions of the bankrupt act, but that, in equity, a trustee cannot contract with himself as he may with third parties. If he exercises in his own favor the powers lie may rightfully exercise in favor of another, the court does not stop to inquire whether he gained or lost. It is enough that the beneficiary is dissatisfied with the transaction for the court to set the transaction aside without requiring the beneficiary to prove actual loss or actual fraud.”

2. S°o?edftOT?,00 when. It must be assumed that the Fowlers were bona fide creditors of the corporation, and therefore were entitled to a pro rata distribution of the assets. But, being directors and managers of the corporation, the law will not permit them to secure to themselves any preference or advantage over other creditors. (Hays v. Citizens’ Bank, 51 Kas. 535.) Under the rules of equity, George Fowler took the property charged with a trust -in favor of the creditors. If the property remained in his hands, the creditors might enforce a trust against the same ; but, as it has passed out of his hands, he may be compelled to account for the fund and contribute pro rata toward the payment of the debts of the company to the extent of the fund which he has received. It is contended in his behalf that if it is granted that the assets should have been applied pro rata upon the debts of the company, and therefore that George Fowler must refund all that he has received in excess of his pro rata share, that his interest in the partnership is not shown, and therefore it cannot be determined the amount he is liable to refund. We have no such difficulty in this case, as it is agreed that, if the plaintiff is entitled to recover, the amount of recovery shall be $4,900, with interest from November 14, 1889. Were it not for this agreement there would be some difficulty in determining the amount which the plaintiff would obtain upon a pro rata distribution of the assets. It is clear, however, upon the agreed facts, that the plaintiff was a bona fide creditor and is entitled to recover from George Fowler, who, with notice of all the circumstances, has appropriated to himself more than half a million of dollars of the assets of the corporation, and that the' agreement made fixes the amount of such recovery.

It is strongly contended that there is a defect of parties and that Muir, Booth, the company and Fowler Bros, are indispensable parties. As already indicated, the presence of Muir and Booth would be necessary to proceedings to subject the property which has been transferred to the payment of the plaintiff’s judgment. They are named in the petition, but whether they were served or not does not appear, and in their absence that kind of relief cannot be granted.

3. ajtionft0 4. watra?!?-That, however, will not prevent a personal accounting by George Fowler of so much of the trust fund as he may have received and placed beyond his control. In respect to the other parties alleged to be necessary to a final disposition of the cause, the objection made by the defendant is not available. No objection with respect to the parties was made in the court below. Under § 89 of the code, where upon the face of the petition there appears to be a defect of parties plaintiff or defendant, the defendant may demur thereto upon that ground, and where the petition does not disclose that fact the objection may be taken by answer; but if no objection is taken either by demurrer or answer, the defendant is deemed to have waived the same. (Civil Code, § 91; Railway Co. v. Nichols, 9 Kas. 248 ; Parker v. Wiggins, 10 id. 420 ; Gilmore v. Norton, 10 id. 491; Seip v. Tilghman, 23 id. 291.)

5. received ofstatSe^i limitations. There is a further contention that the cause is barred by tlie statute of' limitations, which provides that an action for relief on the ground of fraud'must be brought within two years after it accrues. The judgment was obtained, as we have seen, in June, 1885, and this action was not brought until January 26,1889. Laying aside the fact that the execution was not issued upon the judgment until 1887, it still appears that the cause is not barred. An-action upon the same judgment was brought against the defendant by John C. Tom-linson, as receiver of the bridge company, in March, 1888, and that action remained pending until about the time the present action was begun, when it was dismissed without prejudice, the receiver having been discharged. As Tomlinson was appointed receiver of all the property of the bridge company, and was authorized to collect all claims and demands due the company, he was a proper party to bring the suit, and hence the statute did not run during the pendency of that action. It is true that about 2 years and 10 months elapsed between the rendition of the judgment which is the basis of this action and the time when the action was brought by the receiver, but it is agreed that between June 25, 1885, and June 25, 1888, George Fowler was absent from the state one year, and therefore the bar was not complete.

6. Creditor’s bm-It is finally urged in support of the judgment that this action cannot be maintained upon the judgment-of the circuit court of the United States. We think the judgment of the federal court for the district of Kansas cannot be regarded as that of a foreign court. While there is some diversity of judicial opinion upon this question, there can be little doubt that it was the intention of the legislature of Kansas to put the judg-meiits of the circuit court rendered within this state upon an equal footing with the judgments of courts of record of the state. Under § 419 of the civil code it is'provided that "judgments of courts of record of this state, and of courts of the United States rendered within this state, shall be liens on the real estate of the debtor within the county in which the judgment is rendered. ’ ’ See, also, Ballin v. Loeb, 78 Wis. 404 ; Bullitt v. Taylor, 34 Miss. 708 ; Embry v. Palmer, 107 U. S. 10 ; Stock Co. v. Butchers’ Union, 120 id. 141; Bank v. Construction Co., Fed. Rep. 314. '

The judgment of the district court will be reversed, and the cause remanded, with the direction to enter judgment in favor.of the Chicago & Atchison Bridge Company against the executor and trustees'of the estate of deceased for the sum of $4,900, with interest from November 15, 1889.

All the Justices concurring.