287 Mass. 280 | Mass. | 1934
By this suit in equity the plaintiff seeks to establish a claim against the defendant, The Mayfair, Inc., and to have declared void a personal property mortgage, given by The Mayfair, Inc., to the defendant Mark Sherman, and to have set aside a foreclosure sale thereof, on the ground that these were a fraud upon the plaintiff as a creditor. A final decree was entered granting the relief prayed for, and the case is before this court upon the appeals of two of the defendants from the final decree and exceptions to the judge’s refusal to rule as requested. The evidence is reported. The record also contains findings and rulings by the trial judge.
The findings of fact by the trial judge are these: The plaintiff was a corporation duly organized and having a place of business in Boston. Prior to the filing of the bill the defendant The Mayfair, Inc., was indebted to the plaintiff for goods sold and delivered to it in the sum of $1,027.51. The goods were furnished between March 1,
Upon these facts the trial judge found and ruled that the execution and delivery of the mortgage and note by the defendant The Mayfair, Inc., to the defendant Sherman, and the subsequent foreclosure sale, constituted a positive and actual fraud upon the creditors of the defendant corporation. A final decree was ordered, “substantially, in the form prayed for in the bill, with costs, and dismissing the bill as to the defendant Club Mayfair, Inc.”
This being a suit in equity, with findings of fact and a full report of the evidence, on appeal to this court it is the duty of this court to decide the case upon its own judgment, giving due weight to the findings made and not reversing them unless plainly wrong. Moss v. Old Colony Trust Co. 246 Mass. 139, 144. In such a case the refusal of the trial judge to grant requests for rulings of law is considered as presenting the principles which the appealing party would have this court apply to the performance of its duty to order a correct decree upon the pleadings and evidence, whatever view of the law was entertained by the trial judge. See Graustein v. Dolan, 282 Mass. 579, 583-584.
It is not entirely clear upon what principle of law the trial judge made his final rulings, but presumably the facts were found in accordance with his understanding of the applicable principle of law. The evidence was conflicting and the credibility of the witnesses was important.
The evidence shows that the authorized capital was $50,000, consisting of five hundred shares, par value $100, and the amount then to be issued as three shares; that these three shares were issued to Staviski, Sherman, and Kabatznick; that Kabatznick invested no money in the undertaking, the stock being issued to him for expenses incurred in behalf of the corporation; that the original money to finance the undertaking was to be furnished by Staviski, Kaufman, and Sherman in the proportion of twenty-five per cent by Staviski and proportionately half of the remainder each by Kaufman and Sherman; that
According to the evidence, if Kaufman’s interest was $24,135.47 and Staviski contributed $5,000 or $6,000 this would just about make up the amount of $29,700, which appeared on the balance sheet of October, 1930, as subscribed capital stock. This was stated in substance to represent the original capital investment of the three men. But none of it could have been Sherman’s as a mere matter of numerical calculation. These advances were originally carried in the “loans payable,' Sherman” account before they appeared in the books as set up, in the subscribed capital account. Sherman’s original and initial investment of $19,156.47 appeared in its “loans payable, Sherman” account at all times. Other advances to the corporation by Sherman appeared in this loan account payable to him. Then he bought out Kaufman’s interest within a very short time after The Mayfair, Inc., had opened. While Kaufman’s interest presumably appeared in this account of October, 1930, as capital subscribed, he seems rather to have stood at least to some extent in the position of a creditor of the corporation. He is spoken of as the contractor who furnished the equipment. Sherman, when he bought Kaufman’s interest, agreed to pay him so much money and assume certain bills of the corporation. The trial judge found that “The premises at 54 Broadway were fitted up for occupancy by one Kaufman to whom the corporation became indebted for considerable sums, and on or about November 6, 1930, an agreement was entered into by which Kaufman by assignment conveyed to Sherman all his claims against The Mayfair, Inc., and gave to
If the evidence and the findings by the trial judge justified a conclusion that only three shares of the defendant corporation were ever subscribed for and that with the exception of the $5,000 alleged to have been advanced by Staviski all advances which were made by Sherman were loans and intended as such by him, then he, being an officer of the corporation, could not compete with legitimate creditors of the corporation in the distribution of its assets. For this reason the decree of the court below was right.
This court adheres to the usual rule that ownership by a person of all the stock of a corporation does not warrant disregarding the corporate entity and does not fasten on such person liability for the obligations of the corporation. Berry v. Old South Engraving Co. 283 Mass. 441, 450-451, and cases cited. Circumstances sometimes exist which permit a sole stockholder to prove his claim against the corporation in .competition with other creditors, Salomon v. A. Salomon & Co. Ltd. [1897] A. C. 22, Wheeler v. Smith, 30 Fed. Rep. (2d) 59, 61, H. E. Briggs & Co. v. Harper Clay Products Co. 150 Wash. 235, but here Sherman tried to run the business which required expenditures of well over $75,000 on a stock investment of $100 by himself and possibly $5,000 or $6,000 by another. He entirely controlled the affairs of the corporation, and was in no proper sense a creditor, but was an owner of a substantial part of it. See Luckenbach Steamship Co. Inc. v. W. R. Grace & Co. Inc. 267 Fed. Rep. 676, 681. Such stockholder furnishing the capital necessary to the size of the corporation as a loan cannot in the circumstances of this case gain a preference over creditors in the distribution of the assets. Clere Clothing Co. v. Union Trust & Savings Bank, 224 Fed. Rep. 363. New York Trust Co. v. Island Oil & Transport Corp. 56 Fed. Rep. (2d) 580, 583. S. G. V. Co. v. S. G. V. Co. 264 Penn. St. 265.
If Sherman is not to be regarded as a legitimate creditor
If Sherman is regarded as a legitimate creditor, the decree of the court may be justified for the further reason that the facts call for the application of the rule established by the great weight of authority that directors of a corporation which is insolvent or about to become so cannot obtain for themselves a preference over other creditors in respect to the assets by taking a mortgage or other security for preexisting debts. Stuart v. Larson, 298 Fed. Rep. 223. Jackman v. Newbold, 28 Fed. Rep. (2d) 107, 111. Mica Products Co. v. Heath, 81 N. H. 470. Symonds v. Lewis, 94 Maine, 501. Gantenbein v. Bowles, 103 Ore. 277, 289. The rule has been placed on the basis that directors are to some extent trustees of the corporate property for the creditors, and that they should not be allowed to use their superior and far more intimate knowledge of the corporation’s affairs to the detriment of creditors. There is no finding directly to the effect that the corporation was insolvent at the date of the giving of the mortgage, but that the corporation did not have sufficient assets or prospects of credit to meet the claims of those to whom it was indebted may fairly be inferred from the finding that Sherman’s “purpose in procuring the execution and delivery of the note and mortgage was to protect the assets from the landlord and other creditors.” Staviski, whose orchestra was the principal attraction, refused to work in person after conducting the music for the first season, from October, 1930, and as a consequence the business had fallen off considerably. Sherman testified that the mortgaged property was worth much less than $46,000 at the time the mortgage was given. In May, 1932, there were general creditors of the corporation to an amount of approximately $6,000 or $7,000 who had no notice of the encumbrance. After foreclosure of the mortgage there was about $1,000 to satisfy claims amounting to $8,000 or $9,000 in addition to what
' Although Sherman testified that he advanced about $2,000 to the corporation after obtaining the mortgage, it was found by the trial judge that the only consideration was the preexisting debt as disclosed on the books. Certainly the giving of the mortgage was not part of a transaction putting new money into a corporation or part of any arrangement looking to the carrying on of the business in a rational expectation and hope of ultimate success. The case at bar is in this respect to be distinguished from Holt v. Bennett, 146 Mass. 437, where it was held that payments to directors of money borrowed from them made in the usual course of business, and not in view of the probable insolvency of the corporation, and while it expects in good faith to proceed with its business, are not frauds upon the other creditors and cannot be recovered by them from the directors to whom such payments were made. Sanford Fork & Tool Co. v. Howe, Brown & Co. Ltd. 157 U. S. 312, 318. See also Cosmopolitan Trust Co. v. S. L. Agoos Tanning Co. 245 Mass. 69, 73.
If the evidence established a loan to the corporation, Sherman could not as against creditors of the corporation enforce the mortgage, because it confessedly was given with actual intent to hinder, delay and defraud creditors of the corporation. G. L. (Ter. Ed.) c. 109A, § 7. Crowninshield v. Kittridge, 7 Met. 520. Dondis v. Lash, 277 Mass. 477. If the evidence established a loan and mortgage without actual intent to defraud creditors of the corporation, the corporation could not secure Sherman, its treasurer and one of its board of directors, in preference to other creditors. See cases above cited. If the evidence established not a loan to the corporation but a capital contribution, Sherman was not a creditor of the corporation and the mortgage given to secure his interest was void. In any view of the
It is unnecessary to consider the exceptions in detail. They disclose no reversible error. .
Exceptions overruled.
Decree affirmed with costs.