Durlacher v. Frazer

Corn, Justice.

This is an action of replevin, and the defendant (defendant in error) is the sheriff of Albany County. Defendant had possession of the property, several thousand dollars worth of merchandise, fixtures, etc., under levies of various attachment writs against “ The A. M. Bauman Mercantile Company. ”

For some years prior to 1896, A. M. Bauman was in the grocery business at Laramie. August 18, 1893, he borrowed from the plaintiff $6,000, and gave ner a mortgage on his homestead running three years, as security. Subsequently, he bought a store building for $6,500, borrowed the amount from the plaintiff, and to secure her gave her a mortgage on the building dated May 23, 1894, and running three years. He also owed the First National Bank of Laramie $4,000, and on January 29, 1896, he and the plaintiff executed their note to the bank for the amount, payable in ninety days. . He also owed the Albany County National Bank a note for $2,000, due February 2, 1896, and had other debts, which made his total indebtedness on February 1, 1896, $22,705.28 as shown by his books. His assets, as shown by his books, amounted to $31,667.09. On the last-named date he organized a corporation under the name of A. M. Bauman Mercantile Company, with a capital stock of $33,000, divided into 330 shares. He controlled the entire stock, 300 shares being issued directly to him, 27 shares assigned to his wife, and one share each to three of his employees, who were also made directors. The certificates for the last-named thirty shares were made out, but never signed or delivered. The stock was issued as fully paid. On February 5, 1896, he borrowed for the company $3,000 from the First National Bank of Laramie, and hypothecated 100 of the shares as collateral, afterward turning over another 100 as additional security for this loan. On the same day he executed a bill of sale to the company of all his personal property, ■including the stock of merchandise, store fixtures, etc., the consideration named being $20,500. On the eighth day of the same month he conveyed his real estate by warranty deed to the company, the consideration named being $11,700. Though the real estate was encumbered with mortgages to the amount of $12,500, the, deed contained a general warranty against all lawful claims, and both conveyances acknowledged the receipt of the considerations recited. Mr. Bauman, in addition to having control of all the stock of the corporation, and being one of its directors, was president, treasurer and-general manager, and the by-laws gaye him entire control of all its business transactions. On May 2, 1896, the indebtedness of <$4,000 to the First National Bank was extended by a new note singed _ ‘ ‘ The A. M. Bauman Mercantile Co., A. M. Bauman, Prestd. and Treasurer, ’ ’ and by the plaintiff. After the incorporation, the company, or Bauman, out of the funds of the company, paid something like $2,500 of his individual debts due to various parties, including interest on the plaintiff’s mortgages for $12,500. The corporation, while engaged in business, 'obtained credit, and at the time of the institution of this suit, was indebted to various parties, including those represented by the defendant sheriff - in this action, in about the sum of $4,000. About January 1, 1897, the company was embarrassed and unable to pay its bills as they became due, and was being pressed by some of its creditors. On January 11, in pursuance of a resolution passed by the trustees on that day, the company executed its note to the plaintiff for $9,000, running two years, and also a chattel mortgage securing it on all its stock, fixtures, accounts, and bills receivable. The resolution recited that it was for the purpose of securing her against the $4,000 due the bank, and to give her additional security to the amount of $5,000 of the $12,-500 for which she held mortgages'"on the real estate, it having depreciated in value. The mortgage was deemed defective in some respects, and a new one was executed and duly filed on January 18. On January 20 possession of the store and the mortgaged property was turned over to the plaintiff under this mortgage, and certain creditors thereupon sued out attachments amounting to more than $4,000 against the company, and the sheriff took possession of the property by virtue of the writs. The plaintiff then retook the property in this action of replevin. The case was tried by a jury, and there was a verdict and judgment for the defendant.

The record is very voluminous, 110 errors being assigned as grounds for a new trial. But in our view of the case it will not be necessary to consider these assignments in detail.

The pivotal question in the case is whether the plaintiff’s chattel mortgage, under which she took possession of all the personal property and effects of the company on January 20, 1897, was a valid lien based upon an actual debt or obligation of the company, as against its existing creditors. It is shown and not denied that the $4,000 due the bank, and the $12,500, of which the remaining'$5,000 of the chattel mortgage is a part, were originally the individual debts of Mr. Bauman. The primary question, then, is whether they, or either of them, became the debt of the company. It is true that in a sense Bauman was practically the company. He owned or controlled all the stock, was given complete control of its operations by the by-laws, and conveyed to it all his property. But, nevertheless, he and the company were legally two distinct persons, each having the right and power to own property and contract debts, and each bound by its and his own obliga-gations in regard thereto, as fully as if they-had been two distinct natural persons. Schufeldt v. Smith, 139 Mo., 372; The Georgia Company v. Castleberry, 43 Ga., 188; Mc Clellan v. Detroit File Works, 56 Mich., 583. That the company, therefore, owed Bauman’s debts is not to be conclusively presumed, from the fact that though operating under a corporate name, he was, in fact, still conducting the same business which he had owned and operated as an individual; but it is a question of fact.to be determined by the evidence.

It is uncontroverted that the only writings which passed between Bauman and the company were a warranty deed for the real estate and a bill of sale of the personal property containing no reservations, delivered by him to the company upon the one hand, and certificates for 330 shares of the capital stock of the company, received by him from the company upon the other hand. The par value of thé shares was $33,000.00, and they were stipulated to be fully paid up. The cqnsideration expressed in the deed was $11,700.00, and in tbe bill of sale $20,500.00, making an aggregate of $32,200.00. So far as the writings are concerned, therefore, I do not think it can be contended that they express or imply any contract upon the part of the company to pay Bauman’s individual debts, amounting, as the evidence shows, to more than $22,000. If there was such a contract then upon the part of the company, at the time of the transfer of the property to it, and in consideration of such transfer, it must have been verbal or else implied from all the circumstances of the transaction.

To establish the existence of a verbal contract there must be proof of some expression upon the part of Bau-man, and some one representing the company, showing that the°minds of the contracting parties, or then’ agents, met upon the proposition and agreed. There must have been some form of words showing the mutuality which is an essential of every contract. The change in the ownership of the property, and the conduct of the business, from Bauman to the company, is not a mere form to suit the convenience and business purposes of Bauman. It was and must be treated as an actual transfer of the property and business from one individual to another, both having full power under the law to hold property and make contracts, and both bound by the same obligations in regard thereto, as if both were natural persons. In the deed and bill of sale there is no intimation of such a contract; no resolution to that effect appears in the records of the corporation, and it is admitted none was ever adopted; Bauman and Howard both testify that it was never mentioned. There is absolutely no evidence of any express contract of the corporation to pay the debts of Baúman.

But Bauman and Howard, a director, and the bookkeeper of Bauman and also of the company, both testify that it was ‘ ‘ understood ’ ’ that the company was to pay the debts of Bauman. And it is contended by the plain tiff in error that this is not only evidence of the fact, but that it is ample proof that there was such a contract. Such a statement entirely unchallenged and standing alone might be more or less convincing to a court or jury that such a contract had been made. But both testify upon cross-examination that the subject of the payment of the debts of Bauman by the company was never mentioned ; and Bauman upon being asked the question, “You simply understood that yourself, and nobody else understood anything about it?” answered: “Well, yes, it might be that way; I should say it was never mentioned at all.” “Nobody ever spoke of it?” — “No, sir.” How Howard reached the conclusion that it was ‘ ‘ understood ’ ’ may perhaps be easily accounted ■ for by the fact that he knew that Bauman did actually pay a large amount of his private debts with the money of the corporation. But it is not competent for a witness to testify that a certain contract was or- was not made. He may state what was said or done, and the conclusion is for the jury or the court. The facts, as distinguished from their conclusion, are stated by Bauman and Howard upon their cross-examination. Howard’s testimony furnishes no proof whatever of the making of the alleged contract; but upon the contrary seems quite conclusively to show that if any such contract was made, he has no knowledge of the facts by which it is to be made to appear. Bauman’s testimony at the utmost only tends to show that it was his own intention to pay his private debts out of the resources of the corporation, for upon cross-examination he admits that, so far as he knows, no one else than himself so understood. Even that it was his intention at the time of the transfer of the property is strongly negatived by other facts in the case. He gaye a clean bill of sale of his personal property, and the payment of his debts was not named as part of the consideration. He gave a deed of the real estate, and the payment was not only not named as part of the consideration, but he covenanted with the company against his debt $12,500.00 by which the property was encumbered. But if it be admitted that this was bis intention, such mere unexpressed intentio'n or understanding of Bauman that be would pay bis private debts from tbe resources of tbe coi'poration, and tbis is tbe utmost tbe evidence tends to show, falls short in the elements necessary to constitute a contract. A valid contract involves an offer and acceptance, and it must bind both parties. 3 Am. & Eng. Enc., 641. The essentials of a contract are said to be: “A person able to contract, a person able to be contracted with, a thing to be contracted for, a good and sufficient consideration, clear and explicit words to express the contract, tbe assent of both contracting parties. ’ ’ Beach on Contracts, Sec. 1. “A contract is tbe meeting of two minds.” Id., Sec. 15.

Many authorities are cited by counsel sustaining contracts entered into with corporations by their directors or officers. But we find no case where tbe mere silent mental operations of one individual claiming to act for himself as tbe one party and for the corporation as tbe other have been held to constitute a contract. Referring to some of tbe cases cited upon this branch of the case, Marsh v. Whitmore, 21 Wall., 178, was a case where bonds belonging to the plaintiff were sold for him by his attorney at public auction, and were bought by third parties for the attorney. In Bassett v. Brown, 10 4Mass., 551, an agent for the sale of 'land procured a deed to be made to himself, the deed being executed by the principal in person. In Thomas v. Brownsville R. R. Co., 109, U. S., 522, the contest was upon a bill to foreclose a mortgage executed by the company to the plaintiffs, two of whom were directors of the company. In Twin Lick Oil Co. v. Marbury, 91 U. S., 587, the company was embarrassed, and a director loaned money to it, taking a deed of trust upon its property to secure the loan. He subsequently bought in the property at public sale under the trust deed. In Pneumatic Gas Co. v. Berry, 113 U. S., 322, the defendant was one of nine directors. The company became embarrassed, he took a lease of its property, continued the business, paid money for tbe company, and rescued it from bankruptcy. The court refused to cancel the lease or require the defendant to account for profits. In Leavenworth v. Chi. Ry. Co., 134 U. S., 688, a director purchased property from a third party in alleged violation of his duty to the company. These and like cases are many of them instructive for the purpose for which they were originally cited by counsel, that a contract between a corporation and its officers is not void but voidable. But they do not, as contended in counsel’s reply brief, meet the objection that the assent of two persons is required in every contract, and that there is no evidence in this case tending to show such assent.

The evidence leaves no room for any doubt that the Bauman Mercantile Company was insolvent. It was not only being pressed by debts which it was unable to pay, but by its mortgage and the transfer by virtue of it to the plaintiff, it was left without a dollar in money or property except its equities in the real estate. _ These were valueless. The execution of the mortgage by the company, and the acceptance of it by the plaintiff, under the circumstances shown, was an admission by both of them that the real estate was not sufficient security for the incumbrances Upon it by $5,000.

The American courts, if oil owing Wood v. Dummer, 3 Mason, 311, have usually held that the capital of a corporation is a trust fund for the payment of its debts. Morawetz on Corporations, Sec., 780; Sanger v. Upton, 91, U. S., 60; Union Ins. Co. v. Frear Stone Manf. Co., 97 Ill., 547; authorities cited; Thompson on Corp., Sec. 2951.

Some of the courts, it is true, have objected to this statement of the law, but it is uniformly held that a corporation can not give away its property or transfer it, unless in good faith for value, if its creditors would thereby be left unsecured. Morawetz on Corp., 789; Hospis v. Northwestern Manf. Co., 48 Minn., 174; Sweeney v. Grape Sugar Co., 30 W. Va., 443; Beach v. Miller, 130 Ill., 162; Hall v. Goodnight, 138 Mo., 581; Shufeldt v. Smith, 139 Mo., 372. This is precisely what was attempted'in this case; to use the entire capital of the company in payment of a private debt of the president which it was under no legal or moral obligation to pay.

In Shufeldt v. Smith, 139 Mo., 372, a partnership composed of three members converted the partnership into a corporation. Subsequently, the company executed a deed of trust, preferring among others, certain debts of the old firm. Other creditors attempted to have the deed set aside upon the ground that these were not debts of the company. The deed was sustained, but upon the specific ground that the evidence, by positive affirmative testimony, showed a verbal agreement that the company was to take all the property of the firm and assume all its debts.

Hall v. Goodnight, 138 Mo., 581, was a case in many of its features similar to the one under consideration. Chamberlain and Terry had been in partnership in the mercantile business. C. bought out T.’s interest in the stock of goods, and gave his note for the purchase price. After continuing the business for a time alone, C. organized a corporation, conveyed to it his property and took . all the capital stock. He kept up the organization by making his clerks and employees nominal stockholders of a share each, and for years paid interest on the note out of the proceeds of the same stock of goods. There was a by-law of the company giving him full power of management, and he controlled the entire business, the other stockholders always obeying his wishes. The company sold to Hall and Terry the goods in dispute at the invoice cost price of $8,100, and they paid the amount $3,806 in checks and cash, and the balance ($4,294), by surrendering the Terry note. The court found that Chamberlain intended the note should be satisfied out of the assets of the concern, and Terry was consulted (as one having an equitable interest in the matter) about the incorporation at the time, and consented to that move. But the court say: ‘ ‘ The debt due from Mr. Chamberlain to Mr. Terry (being merely an individual debt • for which the company was at no time either morally or legally bound) could not be paid from the assets of the corporation, even by consent of all the stockholders, without committing a fraud on the then creditors in the circumstances disclosed. ’ ’ In reply to the contention of plaintiff ‘ ‘ that the note represented the purchase price of the stock of merchandise, and that the assets of the company were, therefore, still equitably bound to respond to that obligation,’’ the court say: “It is clear the stock of goods was turned over to that company by Mr. Chamberlain for the shares of capital stock of the company which he received. . . . The merchandise was paid for (as between Chamberlain and the company) by its issue of capital stock to him, or by the proceeds arising from the capital stock. There is no law or equity to sanction the paying for it again by the company, in the manner which plaintiff’s argument seeks to justify.” That was a suit in replevin against the sheriff, who had levied writs of attachment, and a judgment for the defendant was affirmed.

But it is said the payment of some two thousand five hundred dollars of the debts of Bauman by the company corroborates the making of the contract, and is a ratification of it by the company. The difficulty is there was nothing to corroborate and nothing to ratify. The testimony of Bauman, who knew all the facts,.shows that the company made no such contract at the time of the transfer of his property. Indeed, when asked what he gave for the total stock of the company, he answered, ‘ ‘ All my personal property, real estate, and everything. ’ ’ He also testified that the two papers, the deed and the bill of sale, expressed his contract with the company. Neither of them make any reference to payment of his debts by the company, but upon the contrary, in his deed he covenants against the $12,500 secured upon the real estate. Such payments clearly do not tend to show anything else than the carrying out of his intention to pay his individual indebtedness out of the resources of the company.

It is further contended that the execution of the note by the company with the plaintiff as surety for $4,000 to the bank, is an assumption of that debt, and makes it a legal and binding obligation of the company. Originally the bank held the personal note of Bauman for this amount, with plaintiff as surety. In May, after the incorporation (and after he had obtained the loan for the company of $3,000 from the bank, one of the attaching creditors in this case), he took up this note, and executed in its place the note of the company, with plaintiff as surety. If the bank were the claimant, by reason of this indebtedness, a different question might be presénted. But plaintiff paid off this note, and in doing so she simply paid the debt of Bauman, notwithstanding the form of the paper evidencing the indebtedness. The company received no benefit from the execution of the May note, and there was no injury to the plaintiff. It was a mere extension of the debt of Bauman. As between the plaintiff, Bauman, and the company, the company’s note was entirely without consideration. If, as under all the authorities, the officers of a corporation may not give away its capital to the injury of its creditors, it is difficult to see how their act is validated by their naked promise to so waste it or give it away ninety days or six months beforehand. Mor is there any basis whatever for the claim that because Bauman transferred all his property to the company, the plaintiff thereby lost all security for her debt and the assets out of which she might hope to collect it. Bauman conveyed all his property, but received all the stock of the company in exchange. The stock was of the same value as the property at that time, for the company owed no debts. Her debtor being no worse off financially by the exchange, she was not injured.

It is needless to inquire into the many errors assigned, as upon the conceded facts the plaintiff, in our opinion, was not entitled to a verdict in her favor, and such a verdict could not be sustained by this court. The judgment will be affirmed.

Affirmed.

PotteR, O. J., and Knight, J., concur.

Case Details

Case Name: Durlacher v. Frazer

Court Name: Wyoming Supreme Court

Date Published: Dec 17, 1898

Citation: 55 P. 306

Court Abbreviation: Wyo.