W. P. Noble Mercantile Co. v. Mount Pleasant Equitable Co-operative Institution

42 P. 869, 12 Utah 213, 42 P.R. 869, 1895 Utah LEXIS 19

• Court: Utah Supreme Court
• Decided: December 9, 1895
• Docket: No. 558
• Status: Published

Opinion

Bartoh, J.

In this case the plaintiff seeks to have declared null and void a certain deed of assignment and a conveyance of real estate made by the defendant Mt. Pleasant Equitable Cooperative Institution, and to have a receiver appointed, and the property of the said defendant disposed of according to the rights of its creditors, as they may appear. The facts material to this decision, as shown by the record, are that the defendant Mt. Pleasant Equitable Co-operative Institution was a mercantile corporation; that it became insolvent, and executed, by its board of directors, a deed of assignment to Peter Matsen, as assignee, on the 19th of January, 1894; that therein the defendant Mt. Pleasant Commercial & Savings Bank was made the first preferred creditor, for a debt of $5,000, evidenced by notes secured by mortgage on real estate of said insolvent corporation; that said notes were indorsed by all the directors of said corporation; that John E. Strom, a director, was' a second preferred creditor, for $76, and Neils Rosenlof, for $500; that said corporation was not indebted to said Rosenlof, but that said John E. Strom borrowed $500 from Rosenlof, giving his individual note, and then loaned the same sum to the corporation, taking its note therefor; that under the charter of the corporation the directors had no authority “to sell real estate until first authorized so to do by a majority of the stockholders present at a meeting duly called,” but had power, independent of the stockholders, to sell all other kinds of property belonging to the institution, not needful for the business thereof; that on August 1, 1892, the board of directors conveyed to defendant Christensen a certain piece ■of real estate, without authority of the stockholders, but in March, 1893, upon reporting such sale to the stockholders, no objections were made thereto; that on January 6, 1893, the board caused a mortgage of certain corporate real estate to be made to the defendant bank without authority of the stockholders, but upon reporting the same to them no objection was made thereto; that the deed of assignment was made without the authority of the stockholders; that the intervener, Parsons, attached the property of the corporation, real and personal, including the land conveyed to Christensen, and in his complaint set up his attachment, and prayed that he have first lien on the property attached, and that the deed of assignment be set aside for the same reasons stated in the plaintiff’s complaint, wherein, among other things, it was charged that the “ indebtedness of said bank was made a preferred claim by the board of directors, with the unlawful and fraudulent intent of relieving the directors, of any personal liability upon their indorsements of said note, and that the said director, John E. Strom, was made a second preferred creditor, with the unlawful and fraudulent intent on the part of said board of directors of said corporation of paying the indebtedness to the exclusion of the bona fide creditors.” Upon trial of the cause the court, among other things, decreed that the “preference in favor of John E. Strom, one of the directors of said corporation, for $75, and the preference in the name of Neils Rosenlof, but in reality in favor of said John E. Strom, for $500, are void and unlawful, and that the said two preferences should be vacated, and that the said Strom (for said $75 and for said $500) be treated as if he had been named in the last class of said assignment, instead of the second class therein, and that, except as above stated, said assignment executed by the Mt. Pleasant Equitable Co-op. to said Peter Matsen is valid, and the said Peter Matsen, as assignee thereunder, is entitled to the possession of the property assigned, and to all the property claimed by the said plaintiff and the said intervener by virtue of writs of attachment and writs of execution, and that the said claims of the plaintiff and intervener thereto are unfounded and void.”

Under this state of facts, the appellants claim that the decree of the court was erroneous, and their first contention is that directors of an insolvent corporation, in the disposition of its corporate property, have no power to prefer one creditor over another. TVTe do not deem it necessary to express an opinion on this point, because the controlling question in this case is whether directors who are general creditors of an insolvent corporation which has abandoned the object of its creation can, by deed of assignment, prefer themselves over other creditors. The contention of appellants is that the directors of an insolvent corporation have no such power, while the respondents maintain that such a corporation, in the absence of statutory restriction, may lawfully pay one creditor to the exclusion of another, if its property be exhausted in paying the one. This contention on the part of the respondents appears to be founded on the theory that at common law an individual and a corporation have equal rights regarding the disposition of their property; and as the former may, in the absence of statutory prohibition, transfer his entire property to one or more of his creditors, with the intent of giving preference to him or them over others equally meritorious, so an insolvent corporation, which has no longer any interest in its corporate property, has the right to make a preference, by deed of assignment, among its creditors, whoever such creditors may be, or whatever may be their relation to the corporate property or the corporation. In accordance with this view, it would follow that the directors, if they be also creditors of an insolvent corporation, which is no longer a going concern, and has abandoned tbe objects of its creation, may distribute among themselves all its corporate property, to the exclu-. sion of all other creditors, if the reasonable value thereof bei not greater than their aggregate claims. We are unable to concur in this view of the law. It appears to be well settled by authority that the directors of an insolvent ■corporation, which has become financially embarrassed, and no longer intends to continue its business, cannot, by reason of their superior knowledge of the corporate affairs, ■secure any peculiar advantage to themselves, to the injury ■of other creditors. They are chosen by the stockholders, .and are intrusted with the exclusive control of the property and management' of the corporate business. This creates a fiduciary relation between them and the stockholders, and the corporate property becomes impressed with a trust, which must be administered for the exclusive ■benefit of the stockholders while the corporation is solvent, :and for the benefit of the creditors when it becomes insolvent, and ceases to longer pursue the objects of its-creation. This trust relation forbids that the directors .should administer the corporate affairs for their own special benefit. Nor does it allow them to prefer one stockholder •over another, or themselves as stockholders, in the distribution of dividends or of corporate property. This is •so from the very nature of things, for otherwise no corporation could exist, If the directors could manage the '•business of the corporation in the interest of one or more ¡stockholders, whom they might select, to the disadvantage ■of the remainder, the majority would be enabled to prey •upon the rights of the minority, because .it would be within the power of the majority to select officers to suit their own selfish ends, in fraud of the interests of the minority. This would not only be contrary to all our ideas of trust relations, but it 'would destroy the corporation itself, because contrary to the law of its corporate existence, which says that all stockholders must share pari .passu. So the fiduciary relation existing between the directors and creditors when the corporation has become insolvent, and ceased to carry on its corporate business, forbids that the directors shall, by reason of their superior-knowledge concerning the affairs of the corporation, gain any special advantage by preferring themselves over other-creditors equally meritorious; and this is in full accord with the principle that he who has the management and possession of property for the benefit of others may not dispose of such property for h’is own special benefit, to the injury of any(of the beneficiaries. Koehler v. Iron Co., 2 Black, 715; Manufacturing Co. v. Hutchinson, 11 C. C. A. 320, 63 Fed. 496.

The contention of respondents in regard to the question, under consideration is not only at variance with the trust-relation existing between the directors and creditors of an insolvent corporation, but also with the salutary rules which courts of equity apply to such relations in other cases of trust; for it is well understood that in ordinary cases of trust the trustee can derive no special advantage, to the injury of his cestui que trust, by reason of his possession and control of the property. Nor is such contention in' harmony with the known duties of directors to the-corporate funds, which are to be managed for the interests of the stockholders, and, if debts be incurred, they stand pledged exclusively for the creditors until the debts are-paid. In contemplation of law, the corporate property, in case of insolvency, constitutes a trust fund — First, for the-payment of its creditors; and, second, for distribution-among its stockholders, equally and ratably. If, therefore, a corporation dissolve, and, without first liquidating its liabilities, make distribution of its property among its stockholders, a court of equity will convert all holders of such property, except Iona fide purchasers for value, into-trustees for the creditors, and compel such trustees to account, to the extent of the property so in their hands. In equity the creditors’ claims constitute a lien upon the fund. The doctrine that the assets of a corporation constitute a trust fund for the payment of its debts was announced by Mr. Justice Story in Wood v. Dummer, 3 Mason, 311, Fed. Cas. No. 17,944, and it has been generally accepted and sustained by the highest authority. In that case the plaintiffs, as holders of bank notes, brought a bill in equity against the defendants, as stockholders, for payment of the notes, upon the ground of a fraudulent division of the capital stock of the bank by the stockholders. The eminent jurist, after discussing this subject, with his usual ability and clearness, said: “To me this-point appears so plain on principles of law, as well as-common sense, that I cannot be brought into any doubt that the charters of our banks make the capital stock a. trust fund for the payment of all the debts of the corporation. The billholders and other creditors have the first, claim upon it, and the stockholders have no rights until all the other creditors are satisfied. They have the full benefit of all the profits made by the establishment, and cannot take any portion of the fund until all the other claims on it are extinguished.” Again he says: “If the capital stock is a trust fund, then it may be followed by the creditors into the hands of any persons having notice of the trust attaching to it. * * * The doctrine of following trust funds into the hands of any persons who-are not innocent purchasers, or do not otherwise possess superior equities, has long been established.”

The doctrine here declared is clearly in accord with the rule that the directors of an insolvent corporation which has relinquished the pursuit of its corporate business have no power to prefer themselves over other creditors by general deed of assignment. The same doctrine was accepted and announced by Mr. Justice Swayne in Sanger v. Upton, 91 U. S. 56, where he stated it as follows: “ The capital stock of an incorporated company is a fund set apart for the payment of its debts. It is the substitute for the personal liability which subsists in private copartnerships. When debts are incurred a contract arises with the creditors that it shall not be withdrawn or applied otherwise than upon their demands until such demands are satisfied. The creditors have a lien upon it in equity. If diverted, they may follow it as far as it can be traced, and subject it to the payment of th'eir claims, except as against holders who have taken it bona fide for a valuable consideration, and without notice. It is publicly pledged to those who deal with' the corporation, for their security.” Mr. Justice Deady, in Corbett v. Woodward, 5 Sawy. 403, Fed. Cas. No. 3,223, said: “The great extent to which corporations have become the agency through which the business of the country is transacted, and its property is held and managed, makes it necessary that the salutary rules enforced by courts of equity in other cases of fiduciary relations should be rigidly applied to the numerous and important trust held by the managers of those organizations.” Curran v. State, 15 How. 304; Rouse v. Bank, 46 Ohio St. 493, 22 N. E. 293; Conover v. Hull (Wash.) 39 Pac. 166; Cole v. Iron Co., 133 N. Y. 164, 30 N. E. 847; Sawyer v. Hoag, 17 Wall. 610; 27 Am. Law Rev. p. 847; Robins v. Embry, 1 Smedes & M. 207; Morgan Co. v. Allen, 103 U. S. 498; Olney v. Land Co. (R. I.) 18 Atl. 181; Roan v. Winn (Mo. Sup.), 4 S. W. 736.

A perusal of the cases cited by counsel for the respondents shows that in many of them the facts were wholly different from those in this case, or the claims preferred were secured by mortgages or trust deed, or otherwise, while the corporations were solvent and pursuing the corporate business. No doubt a corporation may, if not forbidden by statute or charter, while solvent and endeavoring to accomplish the objects of its creation, mortgage and otherwise incumber its corporate property to secure its liabilities; and if the transaction- be bona fide a court of equity will enforce such mortgage or other incumbrance, -even after insolvency, at the suit of the creditor. So, in the absence of contrary legislation, a mortgage executed by a corporation, under embarrassed circumstances, to enable it to continue its business, will be sustained, if the whole transaction be in good faith; and a corporation may also, in like manner, obligate itself to a stockholder or director. But in such last cases a court of equity will very closely scrutinize the transactions, and, in case of a contest between a general creditor and a director or other managing officer, will require of the latter very strict proof of good' faith, and that the mortgage or other incumbrance was not executed in expectancy of insolvency, for the purpose of securing an advantage over other creditors, and such transactions may be set aside on. slight grounds. Manufacturing Co. v. Hutchinson, supra; Oil Co. v. Marburg, 91 U. S. 587; Sweeney v. Sugar Co. (W. Va.) 4 S. E. 431; Williams v. Jackson County Patrons of Husbandry, 23 Mo. App. 132. We think the great weight of authority is in favor of the rule that when an incorporation has become insolvent, and abandoned the objects for which it was created, its directors or managing agents • cannot, by deed of assignment, prefer themselves over other creditors, so as to secure an advantage over them by reason of their official positions and-superior knowledge concerning the corporate affairs. In such a crisis its property becomes affected with an equitable lien and trust for the benefit of all the creditors, and equity will not permit those who stand in relation of trustees to them to manage and dispose of the corporate property for the individual benefit of such trustees, regardless of the rights of the cestuis que trustent; not even though they are not trustees, as is contended by the respondents, in the technical sense of that term, because, whatever may be the technical standing “of such officers, they hold, in respect to the corporate affairs, a fiduciary relation to the creditors, which is controlled by equitable rules and principles. In Mor. Priv. Corp. § 787, the author says: “Directors of an insolvent corporation, who have claims against the company as creditors, must share ratably with the other creditors in a distribution of the company’s assets. They cannot secure to themselves any advantage or preference over other creditors by using their powers as directors for that purpose. These powers are held by them in trust for all the creditors, and cannot be used for their own benefit.”

In Drury v. Cross, 7 Wall. 299, the directors of a corporation, with the corporate property, provided for the payment of debts upon which they were liable as indorsers. Mr. Justice Davis, delivering the opinion of the court, said: “The transaction which this case discloses cannot be sustained by a court of equity. The contract of the directors of this railroad corporation was very discreditable, and without authority of law. It was their duty to administer the important matters committed to their charge for the mutual benefit of all parties interested; and, in securing an advantage to themselves not common to the other creditors, they were guilty of a plain breach of trust.” So in Corbett v. Woodward, supra, Mr. Justice Deady said: “A director of an incorporation is a trustee of its property and assets for its stockholders and creditors, and it is contrary to the first principles of equity that he should deal with such property for his own advantage, and te their injury.” In Haywood v. Lumber Co., 64 Wis. 639, 26 N. W. 184, the lumber company was insolvent, and some of the directors were interested in a certain indebtedness of the company. The interested directors constituted a majority of the quorum which voted to secure the indebtedness by giving a mortgage on the real property of the corporation. The mortgage was declared void because a majority of the directors voting that it be given were interested in the indebtedness, and therefore the securing of their antecedent claims constituted an unlawful preference. Mr. Justice Orton, delivering the opinion of the court, said: “In such case the authorities seem to be uniform that the directors and officers of the corporation are trustees of the creditors, and must manage its property and assets with strict regard to their interests; and if they are themselves creditors, while the insolvent corporation is under their management, they cannot secure to themselves any preference or advantage over other creditors.” Cook, Stock & S. § 661; Consolidated Tank-Line Co. v. Kansas City Varnish Co., 45 Fed. 7; McGourkey v. Railway Co., 146 U. S. 536, 13 Sup. Ct. 170; Corey v. Wadsworth (Ala.), 11 South. 350; Jackson v. Ludeling, 21 Wall. 616; Lippincott v. Carriage Co., 25 Fed. 577; White, etc., Manuf’g Co. v. Henry B. Peters Importing Co., 30 Fed. 864; Ogden v. Murray, 39 N. Y. 202; Bradley v. Farwell, Fed. Cas. No. 1,779; Hopkins’ and Johnson’s Appeal, 90 Pa. St. 69; Bliss v. Matteson, 45 N. Y. 22; Gibson v. Furniture Co. (Ala.) 11 South. 365; Bosworth v. Bank, 12 C. C. A. 331, 64 Fed. 615; Stout v. Milling Co., 13 Fed. 802; Adams v. Same, 35 Fed. 433.

In the case at bar the corporation was insolvent, and the directors executed a deed of assignment of its corporate property for the benefit of its creditors. All the directors were indorsers on certain notes, aggregating $5,000, for money loaned to the corporation, and the holder of these notes was made the first preferred creditor. Strom, one of the directors, was-also preferred for $75, and one Eosenlof, to whom the corporation owed nothing, was preferred for $500; and the only excuse which the record contains for making this last preference is that Strom borrowed $50.0 from Eosenlof, and then loaned the same sum to the corporation. The trial court refused to allow these last two preferences, but, after holding them void and unlawful, treated the claims as if they had been named in the last class, and sustained the deed of assignment. Now, if these preferences are “void and unlawful/’ why are they so? We answer, because they were made with intent to hinder, delay, and defraud the other creditors. The fact that the directors assert that they had no fraudulent intent in making preferences is immaterial, because they must be presumed to have intended the necessary and probable consequences of their own acts. When an assignment contains fraudulent preferences, that fact of itself indicates fraudulent intent, and, when an assignment is made with fraudulent intent, it is void as against all creditors who are, because of it, hindered, delayed, or defrauded in the collection of their claims. Comp. Laws Utah 1888, § 2838; Bank v. Barker (ante, p. 13), 40 Pac. 765; Vernon v. Upson (Wis.), 19 N. W. 400; Lesher v. Getman, 28 Minn. 93, 9 N. W. 585; Gere v. Murray, 6 Minn. 305 (Gil. 213); Babcock v. Eckler, 24 N. Y. 623; Goodrich v. Downs, 6 Hill, 438. As a general rule an assignment which is void in part is entirely void, and where it is fraudulent in fact it is void in toto. In this case the preference to Eosenlof was clearly fraudulent in fact, because he had no claims against the corporation. The fact that Strom had a claim against the corporation conferred no power upon the directors to prefer Eosenlof. A preference, being fraudulent in fact, will itself avoid the assignment. This court so held in Coblentz v. Mercantile Co., 10 Utah, 96, 37 Pac. 242. Burrill, Assignm. § 352.

The other preferences in .question were equally void, and fatal to the deed of assignment, because, under the law as we conceive it to be, the directors could not, through their superior or exclusive knowledge of tbe corporate affairs, acquired by reason of their fiduciary relations, secure a benefit or advantage to themselves in derogation of the rights of other creditors. Notwithstanding the position assumed in some of the cases, that the rule which allows a private individual to prefer one, creditor over another may be so enlarged as to apply to a private corporation, this will not, against the great weight of authority, so enlarge the rule as to permit the directors of an insolvent corporation to prefer themselves, by deed of assignment, over other creditors, whose claims are equally meritorious. We conclude, therefore, that the directors of an insolvent corporation, which has abandoned the objects, of its creation, have no power to prefer their own claims over those of other creditors by voluntary deed of assignment. Having reached this conclusion, we refrain from expressing any opinion on the question of the validity of the mortgage to the Mt. Pleasant Commercial & Savings Bank, and of the deed to Christensen, because- we think the parties should have an opportunity to present these questions again, as a new trial must be granted. Nor do we deem it necessary to discuss the remaining points raised in the record. The cause is reversed and. remanded, with directions to grant a new trial.

MÉRRiTT, C. J., and King, J.,'concur.