Seawbi/l, J.
Tbe burden was upon tbe intervener to establish, by tbe greater weight of tbe evidence, its ownership of tbe funds levied upon by tbe plaintiffs. Tbe plaintiffs say that tbe intervener has not carried this burden, contending that there is no evidence in tbe record of any delivery to tbe intervener of tbe Maie Dennis note, upon tbe proceeds of which levy was made.
Tbe note was payable to bearer, therefore want of actual endorsement would not defeat the title of tbe bolder. In some doubtful cases, delivery is largely a matter of intent, and tbe manner of tbe delivery is unimportant; even “retention of possession by tbe maker is not fatal to tbe valid delivery where there has been an intent to deliver and tbe maker bolds tbe instrument as agent of tbe payee.” 10 C. J., 520. And tbe want of actual physical delivery of tbe note by tbe person originally bolding tbe same would not be fatal to tbe title if such person became tbe agent of tbe real owner for collection. 10 C. J., 520.
Tbe evidence respecting delivery of tbe note, actual or constructive, need not be material to tbe consideration of tbe case, since it may be decided on an issue less involved. Tbe evidence discloses that tbe Carolina Mortgage Company, at tbe time an insolvent concern, transferred all of its assets concurrently to tbe Carolina Bond Corporation, tbe Carolina Debenture Corporation — tbe intervener in this case — and tbe Careen Company. Tbe fact that tbe property so transferred consisted largely of equitable interests in mortgages and notes, which may have been of doubtful value, makes no difference to a discussion of tbe principles involved. One other transfer took place during tbe succession of transactions reviewed in this case' — tbe transfer of $1,000.00, represented by tbe total stock of tbe Debenture Corporation, to tbe Maryland Casualty Company. Tbe time relation between tbe latter transfer and other pertinent incidents in tbe case does not exactly appear, but this is not important to tbe result.
Tbe principle that a corporation may not transfer all of its assets to other than a
bona fide
purchaser for value, without provision for tbe payment of its creditors, is very generally accepted. 13 Am. Jur., p. 1121, sections 1233, 1234; 7 R. C. L., p. 573, section 561; 14A C. J., p. 884, section 3064;
Darcy v. Brooklyn Ferry Co.,
196 N. Y., 99, 89 N. E., 461;
McIver v. Hardware Co.,
144 N. C., 478, and cases cited on p. 484, 57 S. E., 169;
Sweeney v. Heap O'Brien Mining Co. and Grand Haven Mining Co.,
186 S.
W.
(Mo.), 793;
Kentucky Beaver Colliers, et al., v. Mellon and Smith,
254 S.
W.
(Ky.), 421. This rule is modified and conditioned so as to show some differences in its application in various jurisdictions, but tbe main principle is tbe same. It may be considered as a proper extension of tbe “trust fund” doctrine, as recognized in this State.
McIver v. Hardware Co., supra.
We consider that the plaintiffs in this action were entitled to the protection afforded by this principle of law as other creditors, since they had begun their action before the transfer of the assets of the defendant Carolina Mortgage Company had been accomplished, although the actual judgment was not obtained until after that date.
Avery v. Safety Cab & Storage Co.,
80 P. (2nd Series), 1099.
Where the corporation receiving the assets of another corporation under the circumstances indicated had knowledge of the existence of debts of the transferring corporation, or of circumstances, which as a matter of law, should put it on inquiry, the transaction will be deemed void as to the receiving corporation, and a creditor may follow the funds into its hands. “Of course, a corporation holds its property subject to the payment of the corporate debts, and when a corporation sells or transfers its entire property to a purchaser, knowing the fact, the latter is chargeable with knowledge that the property is subject to the corporate debts and that equity will, in proper eases, allow the corporate creditors to follow the property into the hands of the purchaser, for satisfaction of their claims.” 7 K. C. L., p. 573, section 561, and cases cited.
Whatever may be the difference in the principle announced in the various jurisdictions dealing with this question, where the sale and purchase of the assets were for a valuable consideration, and whatever the status of the purchasing corporation under such circumstances, and whatever the procedure required in cases where it may become necessary to show actual fraud in the transaction, such distinctions do not apply to instances where there was a grossly inadequate consideration, or no consideration at all. In such cases, regardless of the intention of the parties, the transaction amounts to a legal fraud upon creditors. It strips the corporation of its assets, to which the creditor has a right to resort for the payment of his debt, and substitutes therefor, without his consent, the naked liability of officers and directors who have violated their trust, and who are often financially irresponsible.
In the case at bar, the transfer of assets was made to the intervener— the Carolina Debenture Corporation — a corporation entirely owned by the defendant Carolina Mortgage Company and having substantially the same responsible officers. This by no means diminishes the propriety of applying the rule.
Avery v. Safety Cab & Storage Co., supra.
And the inference of notice, even of intimate knowledge of the condition of the parent corporation and of its inability to make a fair and equitable transfer of its property to its infant creation, seems unavoidable.
In order to maintain its title to the funds in dispute, the burden was upon the intervener not only to show that the item had been assigned to it and, at least, constructively delivered, but, also, we think, under the
circumstances of this case, in order to support the transfer, there should be some evidence of a valuable consideration. We do not find such evidence in the record, but, indeed, such inferences as we may draw from the evidence lead to a contrary view. The devices employed, the creation of these new corporations by the Carolina Mortgage Company, including the Carolina Debenture Corporation, seem to have been prompted by a desire to save the bondholders of the Mortgage Company, and particularly the guarantor — the Maryland Casualty Company— from substantial loss, while unsecured debts and other liabilities of the Mortgage Company were ignored. The interposition of the Debenture Corporation between the Mortgage Company and its unsecured creditors seems to serve no substantial purpose except to render the assets of the Mortgage Company unavailable to pay its unsecured debts.
The plan apparently did not regard an exchange of values as necessary. The Debenture Corporation merely acquired the assets of the Mortgage Company and. participated in their distribution according to a schedule prepared by a committee of the Maryland Casualty Company and the bondholders.
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Seawbi/l, J.
Tbe burden was upon tbe intervener to establish, by tbe greater weight of tbe evidence, its ownership of tbe funds levied upon by tbe plaintiffs. Tbe plaintiffs say that tbe intervener has not carried this burden, contending that there is no evidence in tbe record of any delivery to tbe intervener of tbe Maie Dennis note, upon tbe proceeds of which levy was made.
Tbe note was payable to bearer, therefore want of actual endorsement would not defeat the title of tbe bolder. In some doubtful cases, delivery is largely a matter of intent, and tbe manner of tbe delivery is unimportant; even “retention of possession by tbe maker is not fatal to tbe valid delivery where there has been an intent to deliver and tbe maker bolds tbe instrument as agent of tbe payee.” 10 C. J., 520. And tbe want of actual physical delivery of tbe note by tbe person originally bolding tbe same would not be fatal to tbe title if such person became tbe agent of tbe real owner for collection. 10 C. J., 520.
Tbe evidence respecting delivery of tbe note, actual or constructive, need not be material to tbe consideration of tbe case, since it may be decided on an issue less involved. Tbe evidence discloses that tbe Carolina Mortgage Company, at tbe time an insolvent concern, transferred all of its assets concurrently to tbe Carolina Bond Corporation, tbe Carolina Debenture Corporation — tbe intervener in this case — and tbe Careen Company. Tbe fact that tbe property so transferred consisted largely of equitable interests in mortgages and notes, which may have been of doubtful value, makes no difference to a discussion of tbe principles involved. One other transfer took place during tbe succession of transactions reviewed in this case' — tbe transfer of $1,000.00, represented by tbe total stock of tbe Debenture Corporation, to tbe Maryland Casualty Company. Tbe time relation between tbe latter transfer and other pertinent incidents in tbe case does not exactly appear, but this is not important to tbe result.
Tbe principle that a corporation may not transfer all of its assets to other than a
bona fide
purchaser for value, without provision for tbe payment of its creditors, is very generally accepted. 13 Am. Jur., p. 1121, sections 1233, 1234; 7 R. C. L., p. 573, section 561; 14A C. J., p. 884, section 3064;
Darcy v. Brooklyn Ferry Co.,
196 N. Y., 99, 89 N. E., 461;
McIver v. Hardware Co.,
144 N. C., 478, and cases cited on p. 484, 57 S. E., 169;
Sweeney v. Heap O'Brien Mining Co. and Grand Haven Mining Co.,
186 S.
W.
(Mo.), 793;
Kentucky Beaver Colliers, et al., v. Mellon and Smith,
254 S.
W.
(Ky.), 421. This rule is modified and conditioned so as to show some differences in its application in various jurisdictions, but tbe main principle is tbe same. It may be considered as a proper extension of tbe “trust fund” doctrine, as recognized in this State.
McIver v. Hardware Co., supra.
We consider that the plaintiffs in this action were entitled to the protection afforded by this principle of law as other creditors, since they had begun their action before the transfer of the assets of the defendant Carolina Mortgage Company had been accomplished, although the actual judgment was not obtained until after that date.
Avery v. Safety Cab & Storage Co.,
80 P. (2nd Series), 1099.
Where the corporation receiving the assets of another corporation under the circumstances indicated had knowledge of the existence of debts of the transferring corporation, or of circumstances, which as a matter of law, should put it on inquiry, the transaction will be deemed void as to the receiving corporation, and a creditor may follow the funds into its hands. “Of course, a corporation holds its property subject to the payment of the corporate debts, and when a corporation sells or transfers its entire property to a purchaser, knowing the fact, the latter is chargeable with knowledge that the property is subject to the corporate debts and that equity will, in proper eases, allow the corporate creditors to follow the property into the hands of the purchaser, for satisfaction of their claims.” 7 K. C. L., p. 573, section 561, and cases cited.
Whatever may be the difference in the principle announced in the various jurisdictions dealing with this question, where the sale and purchase of the assets were for a valuable consideration, and whatever the status of the purchasing corporation under such circumstances, and whatever the procedure required in cases where it may become necessary to show actual fraud in the transaction, such distinctions do not apply to instances where there was a grossly inadequate consideration, or no consideration at all. In such cases, regardless of the intention of the parties, the transaction amounts to a legal fraud upon creditors. It strips the corporation of its assets, to which the creditor has a right to resort for the payment of his debt, and substitutes therefor, without his consent, the naked liability of officers and directors who have violated their trust, and who are often financially irresponsible.
In the case at bar, the transfer of assets was made to the intervener— the Carolina Debenture Corporation — a corporation entirely owned by the defendant Carolina Mortgage Company and having substantially the same responsible officers. This by no means diminishes the propriety of applying the rule.
Avery v. Safety Cab & Storage Co., supra.
And the inference of notice, even of intimate knowledge of the condition of the parent corporation and of its inability to make a fair and equitable transfer of its property to its infant creation, seems unavoidable.
In order to maintain its title to the funds in dispute, the burden was upon the intervener not only to show that the item had been assigned to it and, at least, constructively delivered, but, also, we think, under the
circumstances of this case, in order to support the transfer, there should be some evidence of a valuable consideration. We do not find such evidence in the record, but, indeed, such inferences as we may draw from the evidence lead to a contrary view. The devices employed, the creation of these new corporations by the Carolina Mortgage Company, including the Carolina Debenture Corporation, seem to have been prompted by a desire to save the bondholders of the Mortgage Company, and particularly the guarantor — the Maryland Casualty Company— from substantial loss, while unsecured debts and other liabilities of the Mortgage Company were ignored. The interposition of the Debenture Corporation between the Mortgage Company and its unsecured creditors seems to serve no substantial purpose except to render the assets of the Mortgage Company unavailable to pay its unsecured debts.
The plan apparently did not regard an exchange of values as necessary. The Debenture Corporation merely acquired the assets of the Mortgage Company and. participated in their distribution according to a schedule prepared by a committee of the Maryland Casualty Company and the bondholders. The whole transaction seems little more than the attempted taking, through corporate devices, of the entire property of the Mortgage Company by a preferred class of creditors, and a partition thereof amongst them, with no return to the Mortgage Company except a way out. This is not morally or legally satisfying to a creditor whose claim is ignored, and is a method of liquidation which stands somewhat opposed to the principles of law and equity, and is, needless to say, unauthorized.
It is sufficient to say that, on the face of the record, we cannot find evidence of that
quid pro quo
which might serve as a consideration and give to the transfer of its assets by the Mortgage Company to the Debenture Corporation the necessary quality of good faith to support the transaction, or to require a different procedure on the part of the prejudiced creditor to attack it.
If the Corporation has disposed of its property fraudulently, either in fact or in law, so as to evade the just claims of the creditor, and the property has gone into the hands of other than a
bona fide
purchaser, we may ignore the devices by which the assets were wrongfully divested from the Mortgage Company and by which they were returned to it as being void upon the above announced principles, and regard the proceeds of the Maie Dennis note, now in the hands of the Mortgage Company, as being there by original right of ownership, or we may regard the holder as being charged with the trust in favor of the creditor; and when the assets have been subjected to levy by a judgment creditor and the holder intervenes, and both are, therefore, parties to the proceeding, ' the Court will administer the equities and execute the trust by enforcing the levy.
In tbis case, tbe inferences to be drawn from tbe evidence are in snob agreement that tbe court below was justified in tbe instruction given to tbe jury.
We
bave examined tbe exceptions to rejection of evidence, as well as other exceptions in tbe record not bere mentioned, and find
No error.