35 Ind. App. 562 | Ind. Ct. App. | 1903
The court stated the facts as follows: On the 7th day of January, 1896, the Goshen Woolen Mills Company, a corporation, executed to appellant its promissory note, payable on or before January 12, 1897, which note was indorsed by Edmund R. Kerstetter and James L. Kerstetter. There is due on the note in principal, interest and attorneys’ fees $5,325.24. At the time of the maturity of the note the Goshen Woolen Mills Company was insolvent, and was on January 5,1897, and for months prior thereto and ever since has been, insolvent. At the time
As conclusions of law, the court stated: (1) That appellant was entitled to a judgment for $5,325.24 against the woolen mills company and Edmund R. Kerstetter and James L. Kerstetter; (2) that as to the other appellees, appellant take nothing.
The question presented is not the right of a solvent corporation, continuing business, to execute a valid security to a director or officer; nor the right of a director or officer, holding a security executed while the corporation was solvent, to enforce such security after insolvency; nor the validity of a security given a director or officer in case of threatened'insolvency, but given in consummation of a promise made to obtain means to continue business in a just and reasonable belief that the business may be thus continued; nor the right of an insolvent corporation to prefer one or more of its officers by a vote of its directors sufficient without counting the votes of those preferred. But the question here presented is whether a majority or all of the directors of an insolvent corporation may prefer each one of themselves to the exclusion of its other creditors. Rot only were two of the directors acting directly preferred, but one of these and the third director were indorsers on most of the obligations preferred. A preference where the directors are indorsers for the insolvent corporation and a preference where the insolvent corporation is indebted to its directors differ only in that in the one case the directors are indirectly preferring themselves, and in the other they are directly
2. The finding shows that the claims mentioned in the trust deed were bona jide debts of the corporation. It is held that an insolvent corporation may prefer its bona fide creditors in like manner as a natural person, and the fact that such preference may inure to the benefit of directors or officers of the corporation does not make it invalid. Levering v. Bimel (1897), 146 Ind. 545; Henderson v. Indiana Trust Ca. (1896), 143 Ind. 561; Clapp v. Allen (1898), 20 Ind. App. 263; Smith v. Wells Mfg. Co. (1897), 148 Ind. 333; Nathan v. Lee (1899), 152 Ind. 232, 43 L. R. A. 820. But these cases are not authority for the statement that the directors of an insolvent corporation may prefer themselves, or that they may prefer a debt upon which a majority or all of the directors are indorsers.
In Henderson v. Indiana Trust Co., supra, it does not appear from the opinion that the five directors who indorsed the paper were all or a majority of the directors, and in the opinion it is said: “Whether an insolvent corporation may prefer a creditor who is a director or stockholder, we need not and do not decide.” The scope of the decision is thus stated: “It should be remembered that the debt to appellant was a bona fide one; that he was not a stockholder or director, but a stranger to the corporation; that when the accounts were delivered to and accepted by appellant, the corporation was a going concern; that he had no notice or knowledge that the corporation was insolvent, or that the accounts were transferred and assigned to him for the purpose of protecting the indorsees, or with the fraudulent intent to cheat, hinder, and delay the other creditors of the corporation, if there was any such intent.”
In Levering v. Bimel, supra, it is said: “Neither of the appellants in this appeal was a stockholder or an officer
Neither in Smith v. Wells Mfg. Co., supra, nor Nathan v. Lee, supra, was the question of the right of an insolvent corporation to prefer a creditor who was a director or officer of the company, or its right to prefer a debt upon which directors were sureties, considered.
In the above cases the question hero presented was either not considered or expressly not decided. But since the above cases were decided it has been held in Nappanee Canning Co. v. Reid, Murdoch & Co. (1903), 159 Ind. 614, 59 L. R. A. 199, that directors of an insolvent corporation may prefer themselves, although all of them are director creditors. When it is said that an insolvent corporation may prefer its creditors as an individual may, and that a majority of a board of directors not interested may prefer one or a minority of the directors indirectly as surety or sure
But it can not be said' that the denial of the right of the directors of an insolvent corporation to prefer themselves would be to adopt the trust-fund doctrine. Nor can it be said that the theory that the directors hold the corporate property as trustees obtains only in courts that adhere to that doctrine. And when it is said that the trust-fund doctrine has'been repudiated by most of the states of the Union it must not be understood that upon repudiating the doctrine the courts of those states have permitted directors to prefer themselves along with other creditors. In a very large majority of the states where that doctrine has been repudiated it is only to the extent of recognizing the right of insolvent corporations to prefer their common, unofficial creditors in the same manner and to the same extent that an insolvent)
It is quite true that while the corporation is a going concern the directors are the trustees primarily of the stockholders, who are the real parties in interest. But when the corporation becomes insolvent, the relation of these trustees-towards the assets has not changed. They no longer hold the assets in trust for the stockholders, as the stockholders have parted with all beneficial interest in the assets, because the same by force of law is transferred to the creditors. But because of the insolvency nothing has taken place that has changed the relation of the directors to the remaining assets. These remaining assets must go to the creditors. The directors must preserve tifie assets for this express purpose, and are powerless to make, any other disposition of them. These assets must go to creditors, and to no one else, although, under the doctrine of preference, not necessarily to all creditors, or classes of creditors, alike. As the relation of the directors to the assets has not been changed by the insolvency, they necessarily hold the assets, not for themselves, hut in trust for the creditors who now have the exclusive interest; so that it must not be understood that there is no trust relation between the directors and the creditors. They hold these assets in trust for the payment of the debts, either pro rata or preferentially, and they can
A court would not hesitate to repudiate any action of a director of a solvent, going corporation whereby he sought to use his official position to advance his personal interests beyond those of others of equal merit. This is true because of the fiduciary relation of a director towards all persons
As bearing upon the proposition that directors may not prefer themselves, see, also, Richardson v. Green (1890), 133 U. S. 30, 10 Sup. Ct. 280, 33 L. Ed. 516; Wisconsin, etc., Ins. Co. v. Lehigh, etc., Coal Co. (1894), 64 Fed. 497; Siddell v. Missouri Pac. R. Co. (1897), 78 Fed. 724, 24 C. C. A. 216; Standard, etc., Oil Co. v. Excelsior Refining Co. (1902), 108 La. 74, 32 South. 221; Krause v. Malaga Glass Co. (1889) (N. J. Eq.), 18 Atl. 367; Merchants Nat. Bank v. Newton Cotton Mills (1894), 115 N. C. 507, 20 S. E. 765; Mary Lee, etc., R. Co. v. Knox & Co. (1895), 110 Ala. 632, 19 South. 67; Corey v. Wadsworth (1891), 99 Ala. 68, 11 South. 350, 12 Am. St. 29, 23 L. R. A. 618; Curran v. State (1853), 15 How. *304, 14 L. Ed. 705; King v. Union Iron Co. (1890), 58 Hun 601, 11 N. Y. Supp. 603; Hurd v. New York, etc., Laundry Co. (1901), 167 N. Y. 89, 60 N. E. 327; Standard Nat. Bank v. National Silk Label Co. (1900), 63 N. Y. Supp. 312.
Without unduly extending this opinion, we can quote but briefly from a few of the above decisions. Bonney v. Tilley (1895), 109 Cal. 316: “It seems to be well settled that directors of an insolvent corporation, who are creditors of the company, can not secure to themselves any preference or advantage over other creditors in tire payment of their claims.” Monroe Mercantile Co. v. Arnold & McCord (1899), 108 Ga. 119: “In the management, therefore, of the property, after the failure of the corporation, the governing body of officers thereof are charged with the duty of conducting its affairs strictly in the interest of its existing creditors ; and it would be a breach of such trust for them to undertake to give any one of its members any advantage over any other creditor in securing the payment of his debt in
In support of the doctrine that a corporation in embarrassed or failing circumstances may prefer debts due to the directors, or indirectly as sureties, the following cases are cited: Reichwald v. Commercial Hotel Co. (1883), 106 Ill.
In Reichwald v. Commercial Hotel Co. (1883), 106 Ill. 439, it is held that the fact that a creditor is a stockholder does not debar him from obtaining security for debts due to himself to the exclusion of other creditors. But in the same state, in Beach v. Miller (1889), 130 Ill. 162, 22 N. E. 464, 17 Am. St. 291, it is held that if directors are creditors they can not secure any advantage or preference in the payment of their claims at the expense of other creditors; and in Rockford, etc., Grocery Co. v. Standard Grocery, etc., Co. (1898), 175 Ill. 89, 51 N. E. 642, 67 Am. St. 205, the court said: “The law is, however, that an insolvent corporation can not prefer a creditor who at the time is a director therein.”
In Central R., etc., Co. v. Claghorn (1844), 1 Speer Eq. (S. C.) 545, the court did not find that the corporation was insolvent Avhen the mortgages Avere given, but states in the opinion that it can not be said that the company was actually insolvent when the mortgages weré given or that they were given as a means of winding up. The case depended mainly on a statute of that state.
In Richardson v. Green (1890), 133 U. S. 30, 10 Sup. Ct. 280, 33 L. Ed. 516, it is said in the syllabus: “While the relations of a party towards a corporation, as a director and officer, or as its principal stockholder, do not preclude him from entering into contracts with it, from making loans to it, and from taking its bonds as collateral security, a court .of equity will refuse to lend its aid to their enforcement
Farmers, etc., Bank v. Wasson (1878), 48 Iowa 336, Garrett v. Burlington Plow Co. (1886), 70 Iowa 697, and Warfield, Howell & Co. v. Marshall, etc., Co. (1887), 72 Iowa 666, follow the case of Buell v. Buckingham & Co. (1864), 16 Iowa 284, which holds that a director creditor may be preferred, although Judge Cole states there was no evidence that the company was insolvent; but the correctness of the rule seems to be doubted in In re Woolen Mills v. Allender (1897), 101 Iowa 181, 70 N. W. 115. See, also, Singer Piano Co. v. Walker (1900), 113 Iowa 664, 83 N. W. 725, 13 Am. and Eng. Corp. Cas. (N. S.) 269.
In Sargent v. Webster (1847), 13 Metc. 497, it is held that a corporation may prefer creditors, but in that case Sargent was not an officer or director, but simply a stockholder. Massachusetts now has a statute restricting the right of insolvents to prefer themselves.
In Butler v. Harrison Land, etc., Co. (1897), 139 Mo. 467, it was held that the three directors, of an insolvent corporation, who were the sole stockholders, might prefer themselves to the exclusion of all other creditors. In a later case (State, ex rel., v. Manhattan, etc., Mfg. Co. [1899], 149 Mo. 181, 209, 50 S. W. 321), the court, speaking of the Butler case, and other cases, said: “But in these and in all other cases that have come before this court bringing into question the powers and duties of directors they have been treated as trustees of whom the utmost good faith was demanded, 'and nothing has been said in any of its decisions that would justify a director in preferring himself to the detriment of the best interest of the corporation or its stockholders.” That court formerly held that directors could not prefer themselves. Roan v. Winn (1887), 93 Mo. 503, 4 S. W. 736; LaGrange Butter Tub Co. v. National Bank
In Peters v. Bain (1890), 133 U. S. 670, 33 L. Ed. 696, the court accepted the construction given a state statute against fraudulent conveyances by the supreme court of appeals of Virginia as controlling. The right of a corporate officer to prefer himself, to the exclusion of other creditors, was not presented.
Worthen v. Griffith (1894), 59 Ark. 562, follows the Iowa cases, but Arkansas now, by statute, forbids preferences by insolvent corporations.
Catlin v. Eagle Bank (1826), 6 Conn. 233, simply decides that preferences- may be made. No question was. made as to the right of directors to prefer themselves;
If the sole managing agents of a corporation may, even after they know it is approaching insolvency, invite public confidence by continuing the business as a going concern, determine for themselves how long they shall continue the losing business, determine how far the assets shall be depleted before they declare the corporation insolvent, these same managing agents, having reached the point where insolvency must be declared, still acting for the corporation, should not be permitted to appropriate the remnant of the assets to- the payment of their individual unsecured claims to the exclusion of all other creditors. If the right to collect a debt is “a race of diligence,” open alike to all creditors— and this is admitted in some of the above cases, Buell v. Buckingham (1864), 16 Iowa 284, among others — it is difficult to find any sufficient reasoning that will support the conclusion that the outside creditor has an equal opportunity with the director creditor. It is not enough simply
Black, J., concurs.
Henley, C. J., dissents.