Fishel v. Goddard

30 Colo. 147

• Court: Supreme Court of Colorado
• Decided: April 15, 1902
• Docket: No. 4200
• Status: Published

Opinions

Mr. Justice Gabbert

delivered the opinion of the court.

This is an action in the nature of a creditors’ bill, commenced by appellees, judgment creditors of the Fishel-Schlichten Importing Company, a corporation, for an accounting and to recover from Gilbert B. Fishel and others named, who were directors of the corporation, the amount of their judgments, on •the ground that they had converted assets of the company to their own use in excess of such judgments. This, it was claimed, had been effected by the appellant, acting in concert with certain of his co-directors, in purchasing at a mortgage sale goods of the company, for a sum less than their full value, and the object of the action is to compel appellant to account for the profits on these goods up to the amount of the judgments of plaintiffs. To the action the company and others were made parties lefendant. An accounting against all the defendants was prayed, and judgment against such of them as had derived any benefit from the assets in controversy. From a judgment in favor of plaintiffs against Gilbert B. Fishel, and dismissing thé action as to the other defendants, Fishel brings the case here for review on appeal.

The discussion of several different propositions by counsel for appellant is based primarily on the one that, in the absence of an averment of fraud against the company, and the proof of fraud on the part of the directors and the company, a cause of action was neither státed nor proven. We shall first determine this question, as it disposes of all argued on behalf of appellant except those specially noticed later.

Plaintiffs base their right to a recovery against the appellant substantially upon the ground that he has misappropriated or wrongfully diverted assets of the corporation to their injury. ' Their, counsel say “We are seeking a personal judgment against the director for the gains and profits which he made out of goods, which in equity and good conscience should have been subjected to the payment of our claim, but the title to which, through the medium of the chattel mortgage sale, passed to the director/ which put the goods beyond our reach through any ordinary legal process, as is shown by the return of our execution against the company wholly unsatisfied.” In view of the theory upon which counsel for plaintiffs contend that the judgment should be affirmed', we do not deem the question of actual fraud necessarily material, and in stating the pleadings and substance of the evidence, shall exclude, all matters bearing on that subject.

According to the amended complaint it. appears that the company had a stock of goods of the value of $30,000; that its directors caused a chattel mortgage to be executed by the company upon this stock for the purpose of securing an indebtedness due a general creditor of the company; that thereafter they caused the company to execute another chattel mortgage on the same stock to one of their directors, to secure him on account of the endorsement of promissory notes, aggregating the sum of $7,500; that this mortgagee took possession of the mortgaged goods, subject to the prior mortgage, advertised the property for sale under his mortgage subject to the first one, at which sale the property was bid in by appellant, also a director of the company, for the sum of $2,000, subject to the first mortgage; that at the time of this purchase the indebtedness due plaintiffs, which is the basis of their judgment, was in existence, and that it was subsequently reduced to judgment and execution issued thereon, which was returned nulla bona.

For answer the defendants deny that the stock of goods purchásed at the mortgage sale was worth the sum of $30,000, and say it was not actually worth, to exceed the sum of $8,000. On the trial .of the issues thus made, plaintiffs introduced the testimony of one of the directors, who stated, in substance, that, at the time of the sale of the stock under chattel mortgage, it was reasonably worth the sum of $30,000. There was also introduced copies of two trial balances, taken from the books of the company, and dated a few weeks prior to the sale, in each of which this stock of merchandise was stated to be worth a little over $25,000. Between the dates of these statements and time of sale there does not appear to have been any change in the stock, unless it can be said that it was increased. There was testimony on behalf of the defendants to the effect that at the time it was sold under the chattel mortgage, it was not worth over $7,000 or $8,000. The court found that the value of the goods purchased by appellant at the chattel mortgage sale greatly exceeded the amount of his bid, and that this .excess was more than sufficient to cover the amount due the plaintiffs upon their judgments.. As already noticed, plaintiffs base their right to recover against the appellant upon the ground that he has appropriated to his own use profits on the goods purchased at* the mortgage sale, which profits, in equity and good conscience, belonged to the company, , and constituted part of its assets. If facts are alleged in the complaint from which this conclusion can be deduced', and the. testimony tends to establish these facts, or supports those found by the court, within the issues made by the. pleadings which, in law, constitute a misappropriation or wrongful diversion of the assets of the corporation by appellant in the manner claimed, then a cause of action is both pleaded and proven.

The relationship of a director of a corporation to the legal entity which he represents is fiduciary, and the law treats him as a trustee in this respect. — Morgan v. King, 27 Colo., 539. A purchase by him of corporate assets may not be void ab initio as to creditors, but he will not be permitted to reap a benefit to their detriment by dealing in them as a third party, because the law inhibits, a trustee from speculating in the subject matter of his trust. Hence, it follows, that if he does purchase corporate assets he must account to those who have the right to demand it for the full value of the property so purchased. Goddard v. Importing Co., 9 Colo. App., 306; Tobin Canning Co. v. Fraser, 81 Texas, 407.

In this instance the appellant, at a sale under a mortgage to which he was not a party, became the purchaser of property belonging to the company, at a time when he was a director of that concern, which the court found was fairly and reasonably worth, at the time of the purchase, many thousands of dollars in excess of the sum bid, and in excess of the amount of plaintiff’s judgments. The evidence fully sustains this finding. The sale may have been regular in all respects, the mortgage entirely valid, but when he assumed to act for himself in purchasing the assets of the corporation, he was not thereby relieved of the responsibilities and duties which the law imposed upon him as a trustee. He could not abrogate his fiduciary character in this respect temporarily, in whole or in part, so as to relieve himself from' the duties which he owed his principal. He was still trustee when he undertook in any manner to perform acts in connection with the trust estate, so that, whatever profits were in the transaction, measured by the difference in the sum paid and the actual value of the purchase, belonged to the corporate entity, and not to him. The reason for this conclusion is manifest. It was his duty to give the company the benefit of his best judgrhent and care ifi the management of its affairs; he had no right to utilize its assets, except to advance the interests of his company. He was required by reason of his re-, lationship to the company to have the property sold produce the highest price, and to that end, use the knowledge he had derived from the confidence reposed in him as director. If he could employ this knowledge for his own advantage the company would not have the benefit of his disinterested action. Self-interest would prompt him to prefer himself, at the expense of his principal. — Morowitz’Private Corporations, §§ 517-518. We have noticed that appellant was not a party to the mortgage under which the purchase was made, because that is the fact. Whether or not, if he had been, would change the situation, we do not determine, because that question is not presented.

The judgment creditors of the corporation have the right to subject that which belongs to the judgment debtor to the payment of their debts. The misappropriation of corporate funds by a director renders the director making such appropriation personally liable to the existing creditors of the corporation. — Nix v. Miller, 26 Colo., 203. He must, therefore, respond to the plaintiffs on account of their claims up to the extent that he has funds in his hands belonging to the company. In reaching this conclusion, the question of actual fraud is eliminated, and the responsibility of appellant is based primarily upon the ground that as a director he was a trustee of the corporation. As such trustee, the direct profits growing out of the purchase by him of corporate assets belongs to his principal, and an appropriation of such profits as to existing creditors is fraud in law, as against their rights. Counsel for appellant contend that under the doctrine laid down in Crymble v. Mulvaney, 21 Colo., .203, the creditors óf a company cannot question this transaction, because in that ease it was held that the directors of a corporation, as against creditors, may purchase' its assets. It was held in that case that as to creditors, the action of directors in purchasing the assets of their corporation was’ not void ab initio, and could not be impeached except for actual fraud, and as that was absent the creditors had no cause of action. The questions there presented and decided were entirely different from the case at bar. The responsibility of appellant is not based upon the ground that the mortgage under which he purchased was fraudulent in law or in fact, but solely upon the ground that he has appropriated to his own use profits which belonged to the company.

. It is also claimed by counsel for appellant, on the authority of Jones v. Bank of Leadville, 10 Colo., 464, and Breene v. Merchants’ Bank, 11 Colo., 97, and cases cited from the court of appeáls, that the so-called ‘ ‘ trust fund theory, ’ * as applied to the assets of a corporation, is not recognized in this state, and therefore, the action of the directors in causing the company to execute the chattel mortgage under which appellant purchased, as well as his purchase, cannot' be questioned by the plaintiffs. The doctrine announced in those cases has no application whatever to the case at bar. It was held in those cases that the assets of an insolvent corporation do not constitute a trust fund for pro rata distribution among its creditors, as against those who had previously acr quired a lien upon such assets. No such question is presented in this case. There is no attempt to impeach the chattel mortgage under which appellant .purchased, or hold him responsible upon the theory that the company had no right to prefer a creditor. The plaintiffs are merely seeking to subject to the payment of their claims assets which, in law, as to them belonged to their judgment debtor.

Several other cases, including Twin Lick Oil Co. v. Marbury, 91 U. S., 587, are cited by counsel for appellant in support of their argument that transactions of the character under consideration are not inhibited, and cannot be impeached except for actual fraud. An examination of these cases will disclose that it was held, as we have indicated in this case, that the purchase by the director was not void, and such transactions were upheld because it appeared that the purchasing director, in connection with the conditions under which the purchase was effected, had paid fully and fairly what the property was worth. So, in this case, if the latter condition existed, the appellant could not be héld responsible to the plaintiffs.

It is also, claimed on behalf of appellant that the supplemental complaint does not state a cause of action. In this pleading it is charged that on a date long subsequent to the purchase by appellant plaintiffs procured a further judgment against the company upon which execution was issued and returned “no property found,” and prayed that their allegations in this respect may be taken in connection with the allegations in the original complaint with the same force and effect' as if contained therein. This pleading certainly violates 'well known rules. It should have been reformed in the court below, and doubtless would, had appellant taken the proper steps to that end. The reason assigned why this complaint does not state a cause of action is, that it does not appear that the indebtedness which is the basis of the judgment mentioned was in existence at the time of the purchase by appellant. This claim is not tenable. This pleading is made a part of the original complaint in so far as all allegations, except those, contained within itself, are concerned. Hence, it appears by reference to the complaint of ■which, it is made a part, that- the indebtedness in question was in existence at the time appellant made his purchase.

On the trial of the case, appellant was a witness in his own behalf. He had testified that the goods were not worth more than the sum bid. On cross examination he was required to produce his books of account. This it is claimed, was error. It appears that previous to the trial a notice had been served upon him by plaintiffs for the production of certain books of account, which, it is claimed, was insufficient. The question of whether or not the court erred in requiring the appellant to produce his books or whether the notice mentioned was sufficient upon which to base an order to this effect, is immaterial. The order was interlocutory, and even if erroneous, as claimed, did not have any prejudicial effect upon the disposition of the case upon its merits. — Colo. F. & I. Co. v. Four Mile R. Co., 29 Colo., 90; 66 Pac., 902.

In this connection it is also argued that the court erred in allowing appellant to be cross examined on the subject of what his-books disclosed with respect to the amount he had realized from the stock in question. This examination was both regular and proper. While it may be true, as claimed by counsel for appellant, that the value of the purchase should not be determined from the sums which had been realized at sales by retail, extending over a considerable period, where the sales were made in connection with other goods bought from time to time to replenish the stock, nevertheless, in view of the statement by appellant, on direct examination; that the stock in question was not worth more than he paid, it was proper for the purpose of testing his knowledgé and the correctness of his statements' in this respect, to show, as a matter of fact, what amount had been realized-from their sale.

It is urged, however, that the opinion and decree of the trial court discloses that only this character of evidence was considered in determining the inadequacy of the consideration paid by appellant. This claim is not supported by the record. There being a conflict in the testimony regarding the value, of the stock, it was entirely proper as corroborative testimony, for the court to consider what sum had been subsequently realized from the goods for the purpose of determining their value at the time of appellant’s purchase. This is what the court did. It is also said the court did not find what the goods were worth at the time of the sale. It does not appear that the value found was of any other date, and in the absence of unambiguous and specific findings to the contrary, we must presume that the trial court found those facts necessary to support the judgment. —Mining Co. v. Tribe, 29 Colo., 302.

It is also urged on behalf of appellant that the court erred in entirely disregarding all equities in favor of appellant. He appears to have discharged the first mortgage in the sum of $6,000, and paid off the indebtedness secured by the second. These sums would aggregate $13,500. It is also claimed that he discharged other indebtedness of the company, for which he is entitled to credit. . On this subject it appears from his own testimony that when he paid the old accounts of the company he made the best settlement he could and took assignments to himself. What amount he may have paid on these accounts is not made to appear. That is all that he could take credit for. If he settled claims of his principal for less than the face out of funds belonging to the company, the benefit of such settlements must be given his principal. However, this question is not material, for the record does not disclose how much he may have paid in the way of settling accounts, except those secured by the two mortgages, and under the finding of the court as to the value of the purchase, the difference between the amount of the two mortgages and such value leaves an ample' margin from which to' satisfy the claims of plaintiff. ...

Finally, it is contended on behalf of appellant that the court erred in rendering a decree in favor of plaintiffs, because, as we understand the argument, appellant was. the only one. found guilty of fraud, and that judgment could not be rendered against appellant alone. We have already disposed of this question in a former part of the opinion, and stated the reasons why, under the pleadings and the facts found by the court, appellant is responsible tó the plaintiffs. From any point of view, however, appellant certainly can not complain that his codefendants were dismissed. Charles S. Davis was made a party defendant, it being claimed that he had been a party to the transactions by which the assets in controversy were diverted. The Fishel Importing Company, a corporation, was also made defendant, it being claimed that it was organized by the appellant and two of his co-directors, and that the goods purchased by him were transferred to it. In the answer filed by defendants, in which appellant joined, it is alleged that none of the defendants, except appellant, ever purchased or acquired any interest in the property purchased at the mortgage sale. In the face of this declaration on his part, he cannot complain that his codefendants were" dismissed without day, when, according to his own statements, they are not responsible to him for anything growing out of the transaction in question.. They cannot be heard to say that he is responsible to them when they, in effect, disclaim any interest in the subject matter of controversy by asserting there is none. According to the pleadings of the defendants in which appellánt joined, he was the only one— eliminating all questions of actual fraud — personally responsible to the plaintiffs, if any responsibility was established'. The judgment of the district court is affirmed.

Affirmed.

Mr. Justice Steele not participating.