8 S.D. 119 | S.D. | 1895
Lead Opinion
This case, now before us on rehearing, is reported in 5 S. D. 418, 59 N. W. 214, where the unassailed substantive facts are stated as follows: “On the 9th day of May, 1888, the Hicks-Trask Hardware Co., a corporation, being insolvent, confessed judgment against itself in favor of each of the defendants C. E. Deyette and W. W. Lewis, amounting to 11,469.26; the Deyette judgment being for $649.84, and the Lewis judgment for $819.42. After entry of the above judg
In order to affirm the contention of appellant’s counsel and disaffirm our former conclusion, we must adopt and proclaim a rule by which a corporation without surplus profits or unemployed capital may, in contemplation of insolvency, borrow money with which to purchase shares in itself, and, when insolvency occurs, give a preference to the persons from whom the loan was made, by confessing judgments in their favor for an amount equal to the corporate assets, at a time, for the purpose .of, and in such a manner that the rights and claims of l)ona fide creditors are entirely defeated. In determining the rights of these parties, rules of law and statutory provisions bearing upon the questions presented must be viewed in the relation that each bears to the other; and all must be considered with reference to an enlightened public policy, upon which is based a strong and wholesome rule of law, prohibiting a corporation from distributing its capital among shareholders by the purchase of stock in itself to the inevitable detriment of creditors. As observed by Mr. Thompson in the second volume of his recent commentaries on the Law of Corporations, at page 155: ‘‘Stringent precautions to prevent the reduction of the capital of a limited company without due notice and judicial sanction would be idle if the company might purchase its own shares wholesale; and, if it were otherwise, the result would be that the shareholders would receive back the money subscribed, and there would thus pass into their pockets what before existed in the form of cash in the coffers of the company, or of buildings, machinery, or stock, available to meet the demands of their creditors. * * * The purchaser of the stock must be one who succeeds to a liability, distinct from and in addition to that of the corporation. ” Mr. Spelling, after conceding that the foregoing rule is supported by the irresistible weight of authority, and in 'connection with a suggestion that he can see-no valid reason why shares in itself might not be
Commencing at page 5115 of the fifth volume of his Commentaries, Judge Thompson approves in a vigorous manner the rule adopted by all recent text writers, which asserts and emphasizes the proposition that the assets of a corporation are a trust fund for its creditors; and, after stating that it is the only doctrine worthy of any respect, proceeds to discuss at length the fallacy by which courts have been led to hold that a corporation anticipating insolvency has the power of a private individual to deal with its assets, and under like circumstances to prefer creditors; and at page 5121 he concludes his observations in part as follows: “It is thus perceived that the courts which have adopted the doctrine that an insolvent corporation may prefer its creditors have jumped at the conclusion by reasoning that, in the absence of statutory prohibitions, a corporation has the same power in disposing of its property that an individual has. But in adopting this hasty conclusion they have overlooked the fact that the anology between an insolvent individual and an insolvent corporation wholly fails in this: that, although an insolvent individual may turn over his property to certain of his creditors whom he desires to prefer, and may, by so doing, hinder and delay the others, yet he merely hinders and delays them; he does not, by that act, destroy himself; he still lives; and he may, and often does, get on his feet again, and acquire property, and discharge his previous obligations. But when a corporation becomes insolvent, and ceases to have the means of carrying out the objects of its creation, and disposesses itself of all its property, it destroys Itself and, becomes ipso facto dissolved, and, in fact, is regarded
We are fully aware that numerous cases may be found in which judges, though standing upon an eminence, have been unable to observe or unwilling to concede that the assets of an insolvent corporation are a trust fund for the benefit of all Tjonafide creditors, none of whom, at the hands of a corporation are entitled to a preference; but a careful research discloses no case which goes to the extent of holding that a corporation apparently in failing circumstances can borrow money with which to purchase shares in itself, and give to the persons from whom the money is borrowed a preference over all other creditors. Manifestly, a transaction so inconsistent with every consideration of common honesty and public policy, and so disastrous to the credit of corporations, as well as to the rights of those with whom they. transact business, cannot receive the stamp of judicial approval. Adhering substantially to the views expressed in our former opinion, the judgment f>f the trig! court ig afhoiecl,,
Dissenting Opinion
(dissenting). I feel compelled to dissent from the conclusions of the court upon the main propositions discussed in the foregoing opinion. It is always a matter of interest to the general student of the law to know the views of eminent text writers upon any legal question, but it must always be a matter of more particular interest to a court to know what its own legislature has made and established as the law of that jurisdiction; and so, when I find that the statute law of this state expressly allows a corporation to purchase shares of its own stock (Comp. Laws, Sec. 2917), I conclude that the wisdom or unwisdom of such policy is not a question for discussion or settlement by the courts of this state. At all events, it is gratifying to know that, however bad the law may be, or however vicious its policy, it is not original with a Dakota legislature. It is the law of many of the states. It was broadly declared as general rule of law in the Field Commission Code; and in Bank v. Bruce, 17 N. Y. 507, Judge Selden said, ‘ ‘I am not aware of any common-law principle which forbids it.” Be that as it may, our statute says that it may be done, and it does not seem to me allowable for this court to say that what the statute authorizes is contrary to the policy of the law.
I think, too, that the argument of the opinion is predicated almost entirely upon assumed premises, to wit, that the corporation was insolvent, or in contemplation of insolvency, when it borrowed the money with which to buy this stock. The only finding is that it was insolvent when it confessed these judgments nearly four months afterwards. For aught that appears in the record, its then insolvency may have resulted from causes entirely occurring after the money was so borrowed, and that at the time of the loan both borrower and lender may not only have thought, but known, that it was in a solvent and prosperous condition, and even that it then had ‘surplus profits” equal to the amount used in the purchase of this stock. I do not suppose the fact that the corporation
If this case is rightly decided upon the facts found, it is because a note given by a perfectly solvent corporation, for money borrowed to purchase shares of its stock, the purpose being known to the lender, is invalid and unenforceable unless the subsequent purchase of such stock is made by the corporation under the conditions named in the statute, or else that such note, good when made, becomes invalid by the subsequent insolvency of the corporation. The last proposition seems utterly indefensible. It cannot be that a note, valid when made, becomes invalid by a change in the financial condition of its maker. If it is the intention of the court to rest its decision upon the first proposition, I am unable to understand how it can so confidently reach the conclusion it announces, without at least some consideration of the question whether Deyette’s knowledge of the purpose for which the money was borrowed would invalidate his note. There is certainly a very respectable, not to say formidable, line of authorities firmly holding that money loaned to a corporation for a confessedly ultra vires purpose is recoverable, although the lender knew that the money was to be so used. Some of these cases are collected in 27 Am. & Eng. Enc. Law, under head of “Ultra Vires.” Ex parte Credit Foncier, 7 Ch. App. 161, would seem from the general statement of facts, to be much like the case now in hand. Company A loaned money to Company B. ‘Company B. had authority to borrow money, but not to buy up their own shares. Both companies were subsequently wound up. It was jheld that Copipany B was not affected by notice of any illegal!?
In determining the rights of the parties respectively upon the facts found in this case, the first question would seem to be, did the transaction of January 20th create a legal and enforceable claim in favor of Deyette against the hardware company for the repayment of the money so loaned. Respondent claims and this court holds, that it did not, because the money was advanced knowing it was to be used for an illegal purpose, to wit, the purchase by the company of the Trask stock. The purchase of the stock, however, was not necessarily illegal. It would be legal if the stockholders all consented in writing. Comp. Laws, Sec. 2917. It is. found that such consent was not obtained. It is not found that Deyette knew or had notice that it was not obtained. Was it required of him, in order to make his loan valid, to know or see to it that the purchase of the stock was made under such conditions as would make it a permissible and legal transaction? The money was loaned to accomplish a purpose that might be legal or it might be illegal, depending -upon conditions not connected with the loaning of the money, but with the purchase of the stock. There are many cases holding that contracts made to actively aid in the violation of the law are unenforceable, and that money advanced and used for such a purpose cannot be recovered. The cases go upon the ground of guilty knowledge upon the part of the lender, making him in pari delicto with the immediate perpetrator of the wrong. But here there was no guilty knowledge on the part of Deyette, unless the law imputes it from the facts proved. It was not found that he loaned the pionpy for $ie purpose pf, py knowing th^t it ^as to be
A bank or other party loans money to a corporation, knowing that it is to be used in the purchase of real estate. .Must the lpan contract be presumed to be inyalid until the
The findings in this case are entirely consistent with absolute moral and legal innocence on the part of Deyette; entirely consistent with an honest belief on his part, when he loaned the money, that the consent of the stockholders had been or would be obtained. And a simple finding that it was not ob-
In our former opinion, now adhered to by a majority of the court, we went further, and said that the judgment ought not
This trust doctrine, as applied to the assets of corporations, solvent and insolvent, was fully discussed by Judge Brewer in Hollins v. Iron Co., 154 U. S. 371, 14 Sup. Ct. 127, and the construction of the court is thus stated in the head note: “The expression often used, that the property of a corporation constitutes a ‘trust fund’ for its creditors, only means that when the corporation is insolvent, and a court of equity has possession of its assets for administration, such assets must be appropriated to the payment of its debts before any distribution to the stockholders, but, as between a corporation itself and its creditors, the former does not hold its property in trust, or subject to lien in favor of the creditors, in any other sense than does an individual debtor.” In Van Alstyne v. Cook, 25 N. Y. 489, the court, in speaking of the assets of an insolvent, limited partnership, said: “They are trust funds when the courts of equity are. properly appealed to in behalf of the partners, or any partner or creditor, to protect and distribute the same upon equitable principles, and on such application assert the control over them. They are not trust funds in the hands of the partners any more than ordinary partnership property. ” The supreme court of Illinois declares the same doctrine in Roseboom v. Whittaker, 132 Ill. 81, 23 N. E. 339: “The mere insolvency of a corporation cannot have the effect of depriving creditors of their legal remedies, but they are at liberty, notwithstanding the insolvency, to sue the corporation in an action at law, and by means of such proceeding establish a specific lien upon the property seized by attachment or execution. Such lien, when perfected, will doubtless entitle the creditor acquiring it to a preference over ocher unsecured creditors.
The same doctrine as to when the assets of an insolvent corporation become trust funds was declared by the supreme court of Missouri in La Grange Butter Tub Co. v. National Bank of Commerce, 26 S. W. 710. The court said: “In case of an insolvent corporation, a court of equity will make distribution of the corporation assets pro rata among the corporation creditors, and to that end will regard the corporation property as a trust fund. It is in this sense, and upon this principle, that the assets are trust funds. They are trust funds when a court of equity is appealed to in behalf of any member of the corporation or creditor to protect and distribute the assets upon equitable principles.” And again in Alberger v. Bank, 123 Mo. 313, 27 S. W. 657, Judge Barclay, in speaking of the notion that insolvency transforms the assets of a corporation into a trust fund said: “This theory seems to have a singular fascination to some learned jurists, but, in our opinion, it is wholly untenable as applied to the facts of such a case as that before us, under the law of Missouri;” and, after a very thorough and instructive discussion of the question he concludes that “the creditor of á corporation has the same right to secure, by superior diligence or persistency, and to retain, a preference for his claim against a private corporation, that he would have were his debtor an individual engaged in the same line of business, provided, always, that the transaction is honest — that is to say, not a mere cover to a purpose to hinder, delay or defraud other creditors of the failing debtor.” Such is also the declared law in New Jersey. In Wilkinson v. Bauerle, 41 N. J. Eq. 640, 7 Atl. 514, the court said: “If there be no legislative prohibition against the transfer of corporate property or its use in preferring creditors after insolvency, no reasons can be given why such transaction should be invalidated, which would not also invalidate the like transactions of
The supreme court of Alabama is equally pronounced against this ‘trusfcfund” doctrine, and in a very able and elaborate opinion, filed as recently as April of the present year, it expressly repudiates such doctrine, and overrules a number of cases in which its existence had been recognized by that court. •The learned judge who writes the opinion says: ‘‘There is nothing clearer in principle than the proposition that the property of a corporation, solvent or insolvent, bears identically the same relations to the creditors of such corporation as the property of an individual or copartnership, solvent or insolvent, sustains to the creditors of the individual or partnership, and is or is not to be impressed with a trust character upon the circumstances and under the same conditions in the first case as in the latter two.” Jewelry Co. v. Volfer, (Ala.) 17 South. 525. In the still more recent case of Thomson-Houston Electric Light Co. v. Henderson, Electric & Gaslight Co., 21 S. E. 951, the North Carolina supreme court deliberately rejected the “trust-fund” theory, and declared generally that the relation between a corporation creditor and the corporation, whether solvent or insolvent, is simply that of creditor and debtor, and that the
Without quoting from other cases, in which very wise and thoughtful judges have announced similar views, I am satisfied to say that to me they seem right in principle. If, for any reason, there should be a discrimination between different classes of debtors in respect to the right to make preferences among their creditors, as said by Judge Dillon in Buell v. Buckingham, supra, the rule should be declared by the legislature, which has the constitutional power to make and change the law, and not by the courts, which have no such power. It may be remarked, however, that as to some of the cases cited generally in support of the contrary doctrine they were controlled by local statutes which unfortunately are not mentioned, or at least not made prominent, in the opinion. For instance, both Ohio and Texas cases are cited as opposed, and Rouse v. Bank, 46 Ohio St. 493, 22 N. E. 293, and Lyons-Thomas Hard
As to Lewis and his judgment, the facts established by the findings are the same, except that at the date of his judgment and before — but how long before is not found — he was a director and secretary of the company. He, too, loaned money to the company for the purpose of buying the Trask stock and it not being shown that at the time of such loaning and pur
The judgment in this case was confessed. Lewis himself as secretary of the company executed the confession to himself. It was not a hostile proceeding against the company in which he acted as a creditor only, but was a voluntary effort on the part of the company, executed through and by him as its secretary, to giye .himself an advantage over creditors generally,
In many of the states which recognize the general right of an insolvent corporation to make preferences among its creditors, such preferences in favor of its own directors on account of antecedent indebtedness, in the absence of special equities, are not sustained. See Gottlieb v. Miller, 154 Ill. 44, 39 N. E. 992, where a preference was sustained as to outside creditors, and set aside as to directors. See, also, Lippincott v. Carriage Co., 25 Fed. 577, where a large number of cases are cited to the point that directors and managing officers cannot be preferred. Montgomery v. Phillips (N. J. Err. & App.) 31 Atl. 622, followed in Mallory v. Kirkpatrick (N. J. Ch.) 33 Atl. 205; Henderson v. Trust Co. (Ind. Sup.) 40 N. E. 516; Corey v. Wadsworth (Ala.) 11 South. 350. See, also, upon this a valuable note to Lyons-Thomas Hardware Co. v. Perry Stove Manuf’g Co. (Tex. Sup.) in 22 Lawy. Rep. Ann. 802, 24 S. W. 16, in which the editor’s conclusion is thus stated: “On examination of the decisions, it is clear that the weight of authority is overwhelmingly in favor of the legality of preferences to ordinary creditors, except as restricted by statute, and overwhelmingly against the validity of such preferences when made in favor of directors.”
The trial court held the Lewis judgment invalid, both because of the invalidity of its consideration and because it was the result of an attempt to give preference to a director. For reasons stated early in this opinion, I think the first ground untenable. As to the second ground, I am of the opinion that he, being a director, and one of the managing officers of the company, ought not to get any advantage in the nature of a preference, but that the court was wrong in holding his judgment void and in denying him participation in the distribution of the proceeds of sale in the hands of the.sheriff. This seems to be the policy of our statute. If, by a general assignment,
Finally, I cannot quite understand how the court, having deliberately declared that the assets of this corporation, being insolvent, constitute a fund for ratable distribution among its creditors without preference, can affirm this judgment, which gives to this respondent creditor practically the entire assets of the corporation, in the face of the record showing other creditors, whose judgments were confessed at the same time, and which must go unpaid. This is an equitable action in the nature of a creditors’ bill in behalf of this plaintiff only, and the remark of Judge Thayer in Walker v. Miller, 59 Fed. 871, seems pertinent: ‘ ‘If this trust-fund theory is to be adopted to prevent the corporation from granting a preference because of its insolvency, we know of no reason why it should not be invoked to keep attaching creditors at bay, and thus relegate the disposal of the fund, so far as judicial proceedings are concerned, to a court of equity.” See, also, Mallory v. Kirkpatrick, supra.