duPont v. Standard Arms Co.

9 Del. Ch. 315 | New York Court of Chancery | 1912

The Chancellor :

On June 13th, 1911, a receiver for the Standard Arms Company was appointed on the ground of its insolvency, and the general statutory powers were conferred upon the receiver without direction to carry on the business. A few days later the receiver was authorized to carry on the business for a short time, in order to complete certain work. At the time of the appointment, Hartley was serving the company as general manager under a contract of service, made by the company, without a definite period, whereby either party could terminate the contract upon giving to the other three months’ notice. On June 20th, 1911, the receiver notified Hartley that his services would not be needed after July 1st, 1911, and having worked to that date was paid by the receiver for his services to that time. Hartley claims damages for breach of the contract of employment by the termination thereof by the receiver without three months’ notice. His claim is for §888.88, being for three months, less the amount paid by the receiver, for services rendered by Hartley between June 20th, 1911, and July 1st, 1911. It will be seen that1,the breach of contract occurred subsequent to the appointment of the receiver, and was not, therefore, a right of action existing against the company at the time the receiver was appointed. By the exceptions a question is squarely raised in this State for the first time, so far as the reported cases show. It is claimed by the receiver that the appointment of the receiver of the company on the ground of insolvency was such an intervention of the law as to terminate existing contracts to render service to the company as that neither party could be liable to the other for breach of contract, for the reason that the intervention made it impossible for either party to perform the contract, such intervention being in the eye of the law within the contemplation of the parties to the contract when they made it, and, therefore, rightly deemed to be an unexpressed condition of their agreement. The legal foundation for this position, with respect to this particular kind of a claim, being one based on a contract for personal services, is that contracts for personal service for,a stated period are terminated by the death or sicknéSs of the employer or the employed. On behalf of the creditor, Hartley, it is contended that the receiver could not cancel an executory contract for personal services made with the corporation prior to the appointment, without rendering the receiver liable therefor in damages payable like other debts of the company from the assets of the company. The issue is well defined and the authorites differ radically. Control of the fund arising from the conversion of the property into money furnishes the opportunity and imposes the duty on the Court to recognize every substantial equity and every existing right in making distribution of the fund. Claims should be allowed upon principles of equity and good conscience which underlie receiverships. But in so doing rights should be determined on legal principles where such exist. Though the contract of Hartley was made with the corporation prior to the appointment of the receiver, the cause of action, if any, arose after the appointment of the receiver. The breach of the contract was the discharging of Hartley by the receiver. If he had been discharged by the company before the appointment of the receiver, he could have maintained a claim against the assets of the company which came to the receiver though his claim •be then unliquidated.

The appointment of the receiver did not dissolve the corporation, or cut short its legal existence. Chemical Bank v. Hartford, etc., Co., 161 U. S. 1. Being a statutory receiver, the effect of it was to suspend the right and power of its officers to continue the business of the company.''1 The effect of the Delaware statute of 1891, enlarging the jurisdiction of the Court of Chancery over the appointment of receivers for corporations to include cases where insolvency is the sole ground for the appointment, is to transfer to the receiver so appointed the functions of the corporation; and the corporation is therefore necessarily deprived of all management of its property and affairs, except, perhaps, the doing of acts necessary to the perpetuation of its corporate existence, such as elections of officers; for by the Delaware Act, unless limited by the order of the Chancellor, the receiver so appointed, in addition to conserving and collecting the assets of the company, and prosecuting and defending suits, is given in general language power “to do all other acts which might be done by such corporation and may be necessary and proper.” Chapter 181, vol. 19, Laws of Delaware. This is also the legal consequence of the appointment. But even without this statutory or legal consequence, that was in this, and in almost all cases will be, the natural result of the taking possession of all the property and assets of a corporation for the purpose of converting them into money for the payment of its debts and other legal demands. I If it be a legal consequence of the appointment of a receiver of an insolvent corporation, that the officers of the company are thereafter without power or right to deal with, use or dispose of the property of the company, the effect on the rights of both parties to the original contract is the same as though the officers had by a judicial order been expressly prevented from dealing with, using or disposing of the assets of the company. Lenoir v. Linville Improvement Co., 126 N. C. 922, 36 S. E. 185, 51 L. R. A. 146, 151.

The right of the receiver to terminate all unfulfilled contracts made by the company before his appointment is clear. He may choose to continue one and terminate another. A receiver is not bound by the executory contracts of the corporation over whose property he is appointed, and subject to the control of the Court he may abandon and repudiate them, if in his opinion it would not be profitable or desirable to adopt and perform them, and he is entitled to a reasonable time within which to make his election. Wells v. Hartford Manilla Co., 76 Conn. 27, 38, 55 Atl. 599, and cases cited. See also 34 Cyc. 259. Whether the receiver’s termination of unfulfilled contracts gives a right to damages for the breach against the assets of the corporation which has come into the hands of the receiver, may depend on the character of the subject of the contract. If the contract is one of personal service, it is settled that as between individuals, the death of the employer discharges or terminates a contract for personal service. Clark on Contracts, 683, and citations; Yerrington v. Green, 7 R. I. 589; Chitty on Contracts, 1076. So it is held that the death of each party to a contract for a term of service is an implied condition of it which effected a legal termination of it; and, therefore, the death of either party did not give a right against the other for damages for such termination.

The appointment of a receiver for an insolvent- corporation is in effect the laying of an equitable execution on all its assets for the benefit of all such creditors as may be found to have valid claims against it. ''For the purpose of this case, the appointment of a receiver of a corporation has the same result as the death of a natural person as employer.) This is the view taken by the American Courts, with few exceptions. People v. Globe Mutual, etc., Co., 91 N. Y. 174; Lenoir v. Linville, etc., Co. (1900) 126 N. C. 922, 36 S. E. 185; Eddy v. Co-operative Dress Ass’n., 3 N. Y. Civ. Proc. Rep. 442; Loucheim v. Clawson, etc., Co., 12 Pa. Super. Ct. 55; Law v. Waldron, 230 Pa. St. 458, 79 Atl. 647 (1911).

It is said, however, that inasmuch as the assets of a corporation constitute a trust fund for the benefit of the persons who deal with it, and there may be a possibility that the assets of what appears to be an insolvent company may yet be more than sufficient to pay its debts, and sp make a return to the stockholders, therefore, the claim should be allowed. This is held in New Jersey. Spader v. Mural Decoration, etc., Co., 47 N. J. Eq. 18, 20 Atl. 378; Rosenbaum v. U. S. etc., Co., 61 N. J. Law, 543, 40 Atl. 591. But this possibility does not affect the question. / From a legal point of view the contract is terminated by a vis major, the State by its representative, as by the death of a natural person-; and the assets of the company are not applicable to payment of damages for the breach of the contract of service resulting from such termination, any more than the assets of a decedent natural person is liable in the hands of the executor or administrator under like circumstances. The receiver is the arm of the Court, the powers of the officers of the company to deal with its affairs are suspended, and the receiver may rightly suspend the executory contracts made by the company. ¡When a receiver so elects, the sitúatian is the same as when by death the individual employee is stripped of his power to further continue the contract. This possibility of a termination of contracts made with corporations was contemplated by the parties to the contract and was made an unexpressed but implied condition of it. ' It is the suspension, temporary or permanent, of corporate activities by the act of the Court in taking possession of the property and affairs of the company, which operates to at least suspend the right to continue the service or recover compensation for a termination of the service from the assets which the Court has taken into its charge through its receiver. Here the contract of Hartley was one for personal service as general manager, and his claim was based on his discharge without having received three months’ notice. As he was not entitled to serve unless so permitted by the receiver, he cannot recover for compensation for services not rendered.

It should be clear, however, that no opinion is here expressed concerning the right of creditors with claims other than for personal services. Nor is any opinion expressed as to the enforcing of the rights of creditors of a company against its assets in the hands of the receiver, not needed for the payment of such debts and obligations as existed at the date of the appointment. Neither of these questions are before the Court in this case, for there is admittedly an insufficiency of assets to pay all the other claims.

The exceptions to the payment of the claim in whole, or in part, from the assets in the hands of the receiver will be allowed.

Let an order be entered accordingly.