43 F. 204 | U.S. Circuit Court for the District of Western Missouri | 1890
(orally.) This is an application for injunction and the appointment of a receiver. I have given the case such consideration as the limited opportunity would permit. Of course, on this preliminary hearing, before the coming in of an answer, the principal questions to be determined by the court are as to the existence of the solvency or .insolvency of the defendant corporation, and the necessity for the appointment of a receiver under the circumstances. It appears from the face of the bill, and the affidavits pro and con submitted on the preliminary hearing, that this Kansas City Varnish Company, with a paid-up capital stock of $26,000, in the course of a year’s business or more, has to-day an existing indebtedness of about $32,000 in round figures. The affidavits show, as well as the allegations of the bill and the correspondence with its creditors, that for some time past it has been under great .financial distress. It has been under an irresistible pressure, unable practically to meet its accruing and maturing obligations. While it is true that the great body of the indebtedness of this concern does not mature until this month, yet part of the obligations are due, and
Now, it is true that, as a rule of equity practice, the courts are very reluctant to appoint receivers, upon the idea that it is a practical displacement of the board of directors. It is an assumption of the functions of the directors. It displaces the hoard of managers placed there by the stockholders, who sustain the relation of trustees for the stockholders, trustees for the corporation, and trustees for its creditors; and, before the court will take charge of the corporation, and thus displace its chosen directors and managers, it ought to have the clearest evidence of the absolute necessity for such extraordinary action for the protection of the creditors, stockholders, and all parties concerned. But the court, in this case, has been relieved of this aspect or embarrassment of the question somewhat by the conduct of the board of directors. This deed of trust, by w'hich they have placed the entire assets and property of the concern in the hands of this trustee, and authorized him to take immediate possession, which he did do at once, and has since been in the absolute, unrestricted, and un
There is one very prominent fact connected with the history of the case which is not unworthy of consideration. It appears that on a part, in fact a very considerable part, of the indebtedness secured by this deed of trust, the board of directors, or at least a part of them, are themselves indorsers.. They are sureties upon these notes; and this movement on the part of the board of directors was entirely voluntary. It does not appear that they were urged to the making of this deéd of trust by the creditors, but they did this without the knowledge of at least some of the creditors; and it is to be assumed for the purpose of the present inquiry that the board of directors in making this deed of trust, by which they preferred the debts upon which they were sureties, were more concerned for their own protection than for that of the creditors, because they are bound to the creditors for the debt, and it appears that they are solvent. That presents this question: It has been held — and I had occasion to consider the question very thoroughly while on the court of appeals, (City of Kansas v. Allen, 28 Mo. App. 132,) and the opinion has been followed since by the supreme court of this state, or cited with approval — that, after a business corporation ceases to be a “going concern,” and is-no longer possessed of vitality enough to survive and continue its business, and the board of directors conclude that they can go no further, then the directors become, eo instanti, by that very act, trustees for the benefit both of the stockholders and the creditors; and it is not within the power or competency of the trustees to prefer themselves, the board'of directors, as creditors of the concern. Their relation becomes one of trustee to the whole property. They must administer the whole assets of the corporation for the benefit of all of the creditors, to be distributed pari passu equally between them; and they cannot, after the corporation reaches that juncture and condition of affairs, make a preference for themselves. Now,'these directors, in so far as the debts are concerned on which they are sureties, if this deed is sustained, are in effect doing by indirection what they cannot do directly, provided this concern is insolvent, and no longer a going concern. I do not undertake to say at this hearing or at this juncture that the case as presented comes within the rule laid down in the cases to which I refer, but it strikes me, upon first impression, as being so nearly in line with the principle involved, that for the purposes of this preliminary hearing the court ought to treat the matter for the time being as if these directors had undertaken to secure and prefer themselves to the exclusion of other creditors of the concern, taking advantage of their inside knowledge of the actual condition and workings of the corporation to gain a personal advantage. They are bound to consider themselves as trustees of a trust
Going back to the question of solvency, it is very difficult for a court to lay down a definition of solvency or insolvency that is ajiplicable interchangeably to every caso. A great many authorities have been cited by counsel under the bankrupt law. I. would not in this case be disposed to apply the rigor of the rule that obtains in bankruptcy proceedings, — that whenever a business concern is unable to meet its commercial paper as it matures, in the ordinary course of business, it is insolvent. The term must necessarily be construed with reference to the particular facts of the case. Take the case of a farmer who has his farm and stock. He may have a note outstanding, and may be unable to meet it at maturity, and yet he has property, both land and stock, subject to execution, which could he seized and applied to the payment of debts. We would not apply to him the rigors of the commercial law. Then take a corporation like this, a business concern. I think a medium ground is to be taken between the bankrupt law and that in the case of the farmer such as 1 have presented. A business concern like this, with nothing but its franchise, its capital stock, and the intelligence and business capacity of its board of directors, depends for its very life upon credit. It could hardly run a day without credit. It is buying material, manufacturing and selling it. It' must have credit in hank. It must have credit with its vendors, — the parties from whom it buys. I think it would be a very safe rule to say in a case of that character that where it is unable to meet its paper in bank and to other creditors as it matures, and its assets are in such a condition that they arc not available either as security or collateral for the purpose of borrowing, or for the purpose of conversion, and, in addition to that, it is apparent that there would not be sufficient money realized by sale under execution to meet these liabilities, it is practically insolvent.
Ilespondents estimate in their affidavits the plant of property at $20,-000, and the paper owing the concern — notes and accounts outstanding —at $25,000. I think the court would be very safe in saying that, if on a forced sale or execution it had to be wound up within a reasonable time and under ordinary circumstances, there should be realized 50 cents on the dollar of those assets, it would be a pretty large dividend; and it would take about 75 per cent, to meet the debts due and maturing in this month and shortly after. So that I think the concern, with $32,-000 of outstanding indebtedness now nearly due, with no money in bank, credit gone, unable to meet a check of a hundred dollars sent to