Gantenbein v. Bowles

203 P. 614, 103 Or. 277, 1922 Ore. LEXIS 151

• Court: Oregon Supreme Court
• Decided: January 17, 1922
• Status: Published

Opinion

BEAN, J.

1. As a preliminary question the defendants submit that the court had no authority to enter the order on November 19, .1919, that the judgment should take effect as of October 30, 1919. Defendants suggest that there is a conflict of authority as to the power of the court under such circumstances. It should be remembered that there is no question but that the amount of the judgment was due to plaintiff when he instituted this suit. It was not the ordinary nunc pro tunc judgment.

2. The failure of the court to substitute the administrator as plaintiff until four days after the entry of the judgment was an irregularity or matter of form, under the circumstances of this case. A court of equity does not usually concern itself as much in regard to form as it does to substance: Burk v. Boss, 68 Conn. 29 (35 Atl. 763, 57 Am. St. Rep. 60). However, we think the court had authority to enter the judgment, and that the irregularity, if any, was cured by the substitution of the administrator as plaintiff. In Mitchell v. Scoonover, 16 Or. 211 (17 Pac. 867, 8 Am. St. Rep. 282), the syllahns reads-:

“Where a party has so prosecuted his action that he is entitled to a judgment without further contest, or where by delay of the court he fails to obtain judgment when he is entitled to it, and his adversary dies, it is the duty of the court upon proper application to render judgment in favor of such party as of a time when the adverse party was living.”

In the Dartmouth College Case, 4 Wheat. (U. S.) *714 (4 L. Ed. 629), we read:

“Upon the suggestion of the plaintiff’s counsel, that the defendant had died since the last term, the court ordered the judgment to be entered nunc pro tunc as of that term, as follows.”

1 C. J. 166, Section 283, reads:

“An action abates on the death of plaintiff or defendant after trial and before a verdict is rendered, unless the rule is changed by statute. But in courts of equity it is the practice, when a party dies after a cause has been submitted upon the final hearing, for the court, notwithstanding, to go on and render its decision and direct a final decree to be entered up as of the day when the cause was submitted for decision; and the same practice has obtained in some jurisdictions in courts of law.”

3. The defendants also urge that the plaintiff had a plain, speedy and adequate remedy at law, and therefore is not entitled to relief in equity. This is claimed by reason of the defendants having furnished a bond in the sum of $1,000 in the injunction suit, to restrain the plaintiff from attaching the rents reserved in the sublease to satisfy his judgment. This suit is in the nature of a creditors’ suit to subject the assets of the Company in the hands of its directors to the payment of the corporate debts. At the time of the institution of the suit the plaintiff was not informed of the amount of rents that had been collected by the directors, and seeks an accounting to ascertain the amount of such collections. The facts disclosed in the suit render it appropriate for equitable cognizance.

4. Moreover the defendants by their answer have submitted the facts in the case to the equity jurisdiction of the court. Plaintiff had obtained his judgment, endeavored to satisfy the same, and exhausted his legal remedy except for the $1,000 bond. The fact that the defendants had furnished a bond with sureties would not prevent the plaintiff from proceeding against the defendants without the sureties, if he chose to do so. It is apparent that an action upon the bond would not furnish adequate relief. We therefore pass to the merits of the case.

It is contended on behalf of defendants in regard to the assignment of the rents due from the subtenants of the Company and the leases from the Company to the subtenants, on May 28, 1915, that the Company was then a going concern and that the trust doctrine does not apply to the assets of the Company. The law is stated in the brief of the learned counsel for defendants, thus:

“In order that the trust doctrine may apply to corporations, a corporation must either have suspended its business and become insolvent or its assets placed in possession of the Court, and also ceased to be a going concern. (Citing) Sabin v. Columbia Fuel Co., 25 Or. 15 [45 Am. St. Rep. 756, 34 Pac. 692, 35 Pac. 854]; Garretson Hilton Lbr. Co. v. Hinson, 69 Or. 609 [140 Pac. 633]; Childs v. Carlstein Co., 76 Fed. 86; Oil Co. v. Marbury, 91 [23 L. Ed. 328, see, also, Rose’s U. S. Notes].”

It seems appropriate first to notice the condition of the Company at that time and its prospects, or what might reasonably be supposed the outcome would be. It appears that the Company was organized for the purpose of obtaining leases of property and constructing a building thereon at a cost of $350,000, and subletting such leased property. It depended for gain upon the rents it should receive in excess of the ground rent it was required to pay.

5. In May, 1915, the construction of the contemplated building had been abandoned, on account of the failure to obtain a loan to finance the construction. In the fall of 1914, the Company was unable to' pay the taxes required to be paid by the terms of the lease from the Fleischners. The directors gave their personal note for $5,703.75 to the Fleisch- • ners, for the Company, in payment of an advancement for taxes. These taxes were never paid by the Company, the directors, Messrs. Bowles, Rothchild and Stanley, being required to pay the note themselves. As stated by Mr. F. S. Stanley, who was called as a witness for plaintiff, the only asset that the Company had was the lease from the Fleischners and the rents coming in from the subtenants. Mr. J. R. Bowles testified as a witness for defendants, and stated that the obligation to the Fleischners was $3,000 a month; that the taxes amounted to about $11,000; and that the running expenses of the building, the insurance, etc., made the total carrying charges of the Company for 1915 at least $1,500 a month more than the receipts. The rent due to the Fleischners had been reduced to $2,500 per month. In February, 1915, the account in the bant at which the Company did business showed a balance of two cents. This balance was maintained until after May 28th, of that year. After that the moneys received for such rents were deposited in a bank at Hood River, in the name of “F. S. Stanley, Special Account.” As stated by Mr. Stanley, the Company did not have sufficient funds at that time to pay its debts. On May 28th, at a meeting of the board of directors of the Company, at which all were present, we find this record made:

“The President stated that the. meeting had beeen called for the purpose of protecting the sureties as far as might be possible for the amount of rent and taxes which they had been compelled to pay under the terms of the bond given to the lessors of the property at the corner of Third and Morrison- Streets at the time of the execution of the lease;

“And it appearing that the sureties had been compelled to pay under the obligations of said bond upwards of Six Thousand Hollars ($6000) above the total net rentals received by this Corporation, and that they are obligated to pay other sums to prevent the forfeiture of said lease,—

“Now, therefore, on motion duly made and seconded, it is unanimously—

“Resolved: That this Corporation, Willamette Building &' Realty Company, do forthwith assign to Fred H. Rothchild, Joseph R. Bowles and Frederick S. Stanley, sureties on said bond, through their proper officers, who are hereby authorized and directed to execute such assignments, the following leases, to wit: * * ”

Then follows a description of seven leases of the Company to various subtenants.

“Together with all rents due and to grow due thereunder.”

This is the last meeting of the directors of the Company shown in the secretary’s minute-book.

Mr. Bowles testified:

“Q. Now bold on, wait a minute, you did not pay money back to Bowles, Stanley and Rotbcbild by reason of tbe note of September 4th, 1914?

“A. No, but it was tbe intention at tbe time of making tbe assignment to pay back tbe money. -It was tbe intention at tbe time of making tbe assignment to tbe individuals to apply tbe moneys upon tbe indebtedness due tbe individuals of approximately six thousand dollars advanced prior, wbicb was tbe liability of tbe Company to tbe individuals prior to Grantenbein’s first action.

“Q. Mr. Bowles, you did not do so, did you? ■

“A. No, we .changed our course of procedure after making assignments and decided to bold tbe money and pay it over to tbe Pleiscbners.

“Q. You paid all tbe money over to tbe Pleiscbners?

“A. Yes, and to tbe operation of tbe building.”

6. Prom tbe above statement, wbicb we have taken from tbe record, it seems to us that at tbe time this suit was commenced tbe Company was not a “going concern” within tbe meaning of tbe law. It bad but two cents in money, was insolvent, and by tbe assignment to its directors bad placed itself beyond its power to receive a cent in tbe ordinary course of its business. While it was legally responsible to tbe Pleiscbners for tbe monthly rental, tbe collection of its only assets bad been turned over and its income assigned to its directors. Tbe corporation was from a practical standpoint financially impotent. Tbe directors are presumed to know,- and it appears that they did know, tbe financial condition of tbe Company.

Tbe contention of defendants that tbe Company was a going concern is predicated upon tbe fact that in May, 1915, tbe Company was the owner of tbe lease from tbe Pleiscbners and. that this was a valuable property right. As above noted, after May 28th of that year, the Company was legally, although not financially, responsible for the payment of the ground rent; but it had incapacitated itself from collecting any of the rents from its subtenants and' had assigned the same to its directors to secure precedent indebtedness. The transaction was not for a present loan to enable the Company to carry on its business. Granting the rule that a corporation may dispose of its property the same as an individual, we venture the assertion that any person under like conditions as prevailed at that time would not be permitted to place all his property beyond the reach of a judgment creditor for the purpose of defeating the judgment claim, when such creditor was making every effort to obtain satisfaction of his judgment. This' has to do more particularly with the circumstances prevailing about the time of the attachment. The present suit was commenced on March 1, 1917, long after the Company had ceased to do business and disposed of all its property.

We find in 4 Words & Phrases, 3103:

“ ‘Going business or establishment’ is a term applied to a corporation which ‘is still prosecuting its business with the prospect and expectation of continuing to do so, even though its assets are insufficient to pay its debts.’ Corey v. Wadsworth, 99 Ala. 68 (11 South. 350, 353, 42 Am. St. Rep. 29, 23 L. R. A. 618).”

7. By the great weight of authority, where a corporation is insolvent or has reached such condition that its directors or officers see that they must deal with its assets in the view of its probable suspension, they cannot use those assets to prefer themselves as creditors or sureties in respect to past advances to the prejudice of general creditors: 14A C. J. 901, § 3080. In support of this statement numerous cases are cited from the Supreme Court of the United States and many states of the Union, including Craig v. California Vineyard Co., 30 Or. 43 (46 Pac. 421).

The point of time at which the directors lose power to prefer themselves as creditors, and at which the trust fund rule attaches is defined in 10 Cyc. 1056, thus:

“This obligation to hold the assets of the corporation as a trust fund for equal distribution among its creditors attaches to the directors, not only when they have voted the corporation to be insolvent, but whenever the fact that it must discontinue business by reason of the insolvency comes to their knowledge. This knowledge of insolvency is not; and cannot from the very nature of things be a positive knowledge. It is a reasonable belief founded upon probabilities having reference to the company’s affairs. It is sufficient to put an end to the right of directors to prefer themselves as creditors for them to know that it is probably insolvent * * . ”

7 R. C. L. 760, Section 775, reads in part thus:

“It would seem that the position denying the right of directors of an insolvent corporation to obtain a preference by way of security for or payment of debts due them by the corporation, should not be founded upon the trust fund doctrine but is sustainable upon the theory that it is inequitable that a director, whose position as to knowledge of conditions and power to act for the corporation gives him an advantage, should be permitted to protect his own claim to the detriment of others, at a time when it is apparent that all the unsecured debts of the corporation are equally in peril, and that all of them cannot be paid.”

From the opinion in the case of Corey v. Wads-worth, 99 Ala. 68 (11 South. 350, 42 Am. St. Rep. 29, 23 L. R. A. 618), cited by defendant, we quote the following:

“We feel safe in declaring that when a corporation’s assets are insufficient for the payment of its debts, and it has ceased to do business, or has taken, or is in the act of taking, a step which will practically incapacitate it for conducting the corporate enterprise with reasonable prospect of success, or its embarrassments are such that early suspension and failure must ensue, then such corporation must be pronounced insolvent.” 0

An exception to the rule which denies the right to prefer creditors is recognized in some jurisdictions in cases where the corporation, although insolvent, is a “going concern” at the time of the preference, doing business in the ordinary way. Under such circumstances preferences to particular creditors are sustained if made in good faith: 14A C. J. 899, § 3076. As to the rule in this state, see Sabin v. Columbia Fuel Co., 25 Or. 15 (34 Pac. 692, 35 Pac. 854, 42 Am. St. Rep. 756); and Garetson Lbr. Co. v. Hinson, 69 Or. 605 (140 Pac. 633).

The rule rests upon the basis that a corporation has the same right as an individual to prefer general creditors, and in so far it merely involves a repudiation of what has been known as the trust fund doctrine. Under its operation the assets of the corporation, although insolvent, are not a trust fund for its creditors in any sense other than that in which the assets of a partnership or an individual are a trust fund for its creditors: 14A C. J. 897, § 3074. It is declared in that volume, page 898, Section 3075, thus:

“It is an essential .to the validity of a preference under the rule authorizing' the giving of preferences that it should he honestly made to secure or distinguish a bona fide debt, and the right must be exercised without regard to the personal interest of the persons to whom the corporation intrusts its exercise.”

The State of Oregon has adopted the trust fund doctrine: Williams v. Commercial Bank, 49 Or. 492 (90 Pac. 1012, 91 Pac. 433, 11 L. R. A. (N. S.) 857); Macbeth v. Banfield, 45 Or. 553 (78 Pac. 693, 106 Am. St. Rep. 670). oIn the Williams case the preferences given to a stockholder were set aside. In Corbett v. Woodward, 6 Fed. Cas. 531, an opinion by Judge Deady, the syllabus reads:

“The directors of a corporation are trustees for the stockholders and creditors; and where a director by means of his power, as such, secures to himself any advantage over other stockholders, or creditors, equity will treat the transaction as void, or charge him as trustee for the benefit of the injured parties; nor can such director, as to such parties, claim to have acted in ignorance of what it was his duty to know concerning the conduct and condition of the affairs of the corporation.”

The states which recognize the trust fund doctrine hold that directors of a corporation cannot prefer themselves over general creditors -for the security of precedent debts, nor can a director who is surety upon a corporate obligation take any preference over other creditors: 10 Cyc. 1246-1256; 7 R. C. L. 757, 759; Lippincott v. Shaw Carriage Co., 25 Fed. 577; Beach v. Miller, 130 Ill. 162 (17 Am. St. Rep. 291); Corey v. Wadsworth, 99 Ala. 68 (11 South. 350, 42 Am. St. Rep. 29, 23 L. R. A. 618); Conover v. Hull, 10 Wash. 673 (39 Pac. 166, 45 Am. St. Rep. 810); Hogan v. Price River Irr. Co., 55 Utah, 170 (184 Pac. ); Weil v. Defenbach, 31 Idaho, 258 (170 Pac. 103); Hanson v. Choynski, 180 Cal. 275 (180 Pac. 816); Olney v. Conanicut Land Co., 16 R. I. 597 (18 Atl. 181, 27 Am. St. Rep. 767 and note, 5 L. R. A. 361).

In the present case it should be remembered that the indebtedness for which the directors preferred themselves was a past indebtedness. See Beach v. Miller, 130 Ill. 162 (22 N. E. 164, 17 Am. St. Rep. 291), and Illinois Steel Co. v. O’Donnell, 156 Ill. 624 (41 N. E. 185, 47 Am. St. Rep. 245, 31 L. R. A. 265), where the court said at page 634:

‘ ‘ There is a marked difference between a case where a mortgage or other preference is given by an insolvent corporation to a director or officer to secure a pre-existing indebtedness, and a case like this, where the corporation, though in fact insolvent, in the sense above stated, is a going corporation that is seeking- to accomplish the objects of its incorporation, and the security is given to directors for moneys actually and in good faith loaned, at the time the security is given, to such embarrassed corporation, and for its benefit.”

It is the position of defendants that after the assignment of the rents was made they changed their plan and applied the money so obtained in payment of the rents due to the original lessors, and that the rents from the subtenants should first be so applied. This claim was asserted, litigated, considered and determined in the case of Bowles v. Gantenbein, 83 Or. 510. In that case these defendants, who were there plaintiffs, contended that as against all comers the landlord is entitled to his rent and until he is satisfied no other creditors of the tenant can interfere with what is coming from subtenants. They also claimed that, having paid the arrearages, they are subrogated to the rights of the Fleischners and had a prior right to defendant to realize upon what is due the Company from its immediate subtenants.

At page 521 in the opinion on petition for rehearing, Mr. Justice Burnett said:

“In brief, the defendant holds a contract debt against the company. Its obligation to the plaintiffs is likewise upon contract. The two are in the same class. There is nothing in either claim to give one preference over the other. Where the equities are equal the law will prevail. The defendant, being the more diligent in seeking to enforce his claim, has attached and there is nothing in the demand of the plaintiffs to give them priority over him or to stay his hand.”

8. The right to restrain Gantenbein from applying rents from subtenants in satisfaction of his judgment, and permit defendants to apply such income to the satisfaction of the ground rents, as now contended for in the case at bar, was denied. That question is thereby foreclosed and merits no further consideration. The present suit involves much the same question as the former suit of Bowles v. Gantenbein except that perhaps since the pleadings were framed in the former case the Company has become absolutely insolvent and ceased to do business. It is believed that if the principles enunciated in the former case were fully carried out they would be determinative of the present issue.

9. About September, 1915, the sureties on the bond given for payment of rent to the Fleischners, the original lessors, paid to the Fleischners $37,500, the effect of which was to secure to themselves a release as such sureties. It fairly appears from the record that at that time the Company was not responsible for a dollar, and had it not been for the sureties who were unfortunately liable upon the bond that transaction never would have taken place. The defendants now urge that this payment should be prorated as an indebtedness to them for the Company. The payment was not a loan to the Company. It did not benefit the Company, for it had already practically ceased to function. The sureties merely bought their releases. Equity does not demand that this should be done. As we view it the law does not authorize it.

10. It is suggested by counsel on behalf of plaintiff that the decree here should be in favor of Gantenbein for the full amount of his claim. The plaintiff, not having appealed from the decree of the trial court, is deemed satisfied with the findings and decree of that court. This is a well-settled practice in this state and really necessitates no citation of authorities. Counsel for defendant, however, cite: Shook v. Colohan, 12 Or. 239 (6 Pac. 503); Shirley v. Burch, 16 Or. 83 (18 Pac. 351, 8 Am. St. Rep. 273); Thornton v. Krimbel, 28 Or. 271 (42 Pac. 995); Cooper v. Thomason, 30 Or. 162 (45 Pac. 296); Goldsmith v. Elwert, 31 Or. 539 (50 Pac. 867); Board of Regents v. Hutchinson, 46 Or. 57 (78 Pac. 1028); McCoy v. Crossfield, 54 Or. 591 (104 Pac. 423); Miller v. City of Portland, 62 Or. 26 (123 Pac. 64).

It would not be in conformity to equitable principles to allow the defendants as directors of the Company to place themselves in an advantageous position as creditors and defeat the judgment of plaintiff, merely because of the position which they held as officers of the Company at a time when they knew that the Company could not pay all of its creditors. The decree of the Circuit Court was just and equitable.

It follows that such decree should be affirmed. It is so ordered. Affirmed. Rehearing Denied.

McBride, Brown and McCourt, JJ., concur.