30 Colo. 147 | Colo. | 1902
Lead Opinion
delivered the opinion of the court.
The discussion of several different propositions by counsel for appellant is based primarily on the one that, in the absence of an averment of fraud against the company, and the proof of fraud on the part of the directors and the company, a cause of action was neither státed nor proven. We shall first determine this question, as it disposes of all argued on behalf of appellant except those specially noticed later.
Plaintiffs base their right to a recovery against the appellant substantially upon the ground that he has misappropriated or wrongfully diverted assets of the corporation to their injury. ' Their, counsel say “We are seeking a personal judgment against
According to the amended complaint it. appears that the company had a stock of goods of the value of $30,000; that its directors caused a chattel mortgage to be executed by the company upon this stock for the purpose of securing an indebtedness due a general creditor of the company; that thereafter they caused the company to execute another chattel mortgage on the same stock to one of their directors, to secure him on account of the endorsement of promissory notes, aggregating the sum of $7,500; that this mortgagee took possession of the mortgaged goods, subject to the prior mortgage, advertised the property for sale under his mortgage subject to the first one, at which sale the property was bid in by appellant, also a director of the company, for the sum of $2,000, subject to the first mortgage; that at the time of this purchase the indebtedness due plaintiffs, which is the basis of their judgment, was in existence, and that it was subsequently reduced to judgment and execution issued thereon, which was returned nulla bona.
For answer the defendants deny that the stock of goods purchásed at the mortgage sale was worth
The relationship of a director of a corporation to the legal entity which he represents is fiduciary, and
In this instance the appellant, at a sale under a mortgage to which he was not a party, became the purchaser of property belonging to the company, at a time when he was a director of that concern, which the court found was fairly and reasonably worth, at the time of the purchase, many thousands of dollars in excess of the sum bid, and in excess of the amount of plaintiff’s judgments. The evidence fully sustains this finding. The sale may have been regular in all respects, the mortgage entirely valid, but when he assumed to act for himself in purchasing the assets of the corporation, he was not thereby relieved of the responsibilities and duties which the law imposed upon him as a trustee. He could not abrogate his fiduciary character in this respect temporarily, in whole or in part, so as to relieve himself from' the duties which he owed his principal. He was still trustee when he undertook in any manner to perform acts in connection with the trust estate, so that, whatever profits were in the transaction, measured by the difference in the sum paid and the actual value of the purchase, belonged to the corporate entity, and not to him. The reason for this conclusion is manifest. It was his duty to give the company the benefit of his best judgrhent and care ifi
The judgment creditors of the corporation have the right to subject that which belongs to the judgment debtor to the payment of their debts. The misappropriation of corporate funds by a director renders the director making such appropriation personally liable to the existing creditors of the corporation. — Nix v. Miller, 26 Colo., 203. He must, therefore, respond to the plaintiffs on account of their claims up to the extent that he has funds in his hands belonging to the company. In reaching this conclusion, the question of actual fraud is eliminated, and the responsibility of appellant is based primarily upon the ground that as a director he was a trustee of the corporation. As such trustee, the direct profits growing out of the purchase by him of corporate assets belongs to his principal, and an appropriation of such profits as to existing creditors is fraud in law, as against their rights. Counsel for appellant contend that under the doctrine laid down in Crymble v. Mulvaney, 21 Colo., .203, the creditors
. It is also claimed by counsel for appellant, on the authority of Jones v. Bank of Leadville, 10 Colo., 464, and Breene v. Merchants’ Bank, 11 Colo., 97, and cases cited from the court of appeáls, that the so-called ‘ ‘ trust fund theory, ’ * as applied to the assets of a corporation, is not recognized in this state, and therefore, the action of the directors in causing the company to execute the chattel mortgage under which appellant purchased, as well as his purchase, cannot' be questioned by the plaintiffs. The doctrine announced in those cases has no application whatever to the case at bar. It was held in those cases that the assets of an insolvent corporation do not constitute a trust fund for pro rata distribution among its creditors, as against those who had previously acr quired a lien upon such assets. No such question is presented in this case. There is no attempt to impeach the chattel mortgage under which appellant .purchased, or hold him responsible upon the theory that the company had no right to prefer a creditor. The plaintiffs are merely seeking to subject to the payment of their claims assets which, in law, as to them belonged to their judgment debtor.
It is also, claimed on behalf of appellant that the supplemental complaint does not state a cause of action. In this pleading it is charged that on a date long subsequent to the purchase by appellant plaintiffs procured a further judgment against the company upon which execution was issued and returned “no property found,” and prayed that their allegations in this respect may be taken in connection with the allegations in the original complaint with the same force and effect' as if contained therein. This pleading certainly violates 'well known rules. It should have been reformed in the court below, and doubtless would, had appellant taken the proper steps to that end. The reason assigned why this complaint does not state a cause of action is, that it does not appear that the indebtedness which is the basis of the judgment mentioned was in existence at the time of the purchase by appellant. This claim is not tenable. This pleading is made a part of the original complaint in so far as all allegations, except those, contained within itself, are concerned. Hence, it appears by reference to the complaint of
On the trial of the case, appellant was a witness in his own behalf. He had testified that the goods were not worth more than the sum bid. On cross examination he was required to produce his books of account. This it is claimed, was error. It appears that previous to the trial a notice had been served upon him by plaintiffs for the production of certain books of account, which, it is claimed, was insufficient. The question of whether or not the court erred in requiring the appellant to produce his books or whether the notice mentioned was sufficient upon which to base an order to this effect, is immaterial. The order was interlocutory, and even if erroneous, as claimed, did not have any prejudicial effect upon the disposition of the case upon its merits. — Colo. F. & I. Co. v. Four Mile R. Co., 29 Colo., 90; 66 Pac., 902.
In this connection it is also argued that the court erred in allowing appellant to be cross examined on the subject of what his-books disclosed with respect to the amount he had realized from the stock in question. This examination was both regular and proper. While it may be true, as claimed by counsel for appellant, that the value of the purchase should not be determined from the sums which had been realized at sales by retail, extending over a considerable period, where the sales were made in connection with other goods bought from time to time to replenish the stock, nevertheless, in view of the statement by appellant, on direct examination; that the stock in question was not worth more than he paid, it was proper for the purpose of testing his knowledgé and the correctness of his statements' in this respect, to show, as a matter of fact, what amount had been realized-from their sale.
It is also urged on behalf of appellant that the court erred in entirely disregarding all equities in favor of appellant. He appears to have discharged the first mortgage in the sum of $6,000, and paid off the indebtedness secured by the second. These sums would aggregate $13,500. It is also claimed that he discharged other indebtedness of the company, for which he is entitled to credit. . On this subject it appears from his own testimony that when he paid the old accounts of the company he made the best settlement he could and took assignments to himself. What amount he may have paid on these accounts is not made to appear. That is all that he could take credit for. If he settled claims of his principal for less than the face out of funds belonging to the company, the benefit of such settlements must be given his principal. However, this question is not material, for the record does not disclose how much he may have paid in the way of settling
Finally, it is contended on behalf of appellant that the court erred in rendering a decree in favor of plaintiffs, because, as we understand the argument, appellant was. the only one. found guilty of fraud, and that judgment could not be rendered against appellant alone. We have already disposed of this question in a former part of the opinion, and stated the reasons why, under the pleadings and the facts found by the court, appellant is responsible tó the plaintiffs. From any point of view, however, appellant certainly can not complain that his codefendants were dismissed. Charles S. Davis was made a party defendant, it being claimed that he had been a party to the transactions by which the assets in controversy were diverted. The Fishel Importing Company, a corporation, was also made defendant, it being claimed that it was organized by the appellant and two of his co-directors, and that the goods purchased by him were transferred to it. In the answer filed by defendants, in which appellant joined, it is alleged that none of the defendants, except appellant, ever purchased or acquired any interest in the property purchased at the mortgage sale. In the face of this declaration on his part, he cannot complain that his codefendants were" dismissed without day, when, according to his own statements, they are not responsible to him for anything growing out of the transaction in question.. They cannot be heard to say that he is responsible to them when they, in effect, disclaim any interest in the subject matter of controversy by asserting there is
Affirmed.
Mr. Justice Steele not participating.
Rehearing
On Petition for Rehearing.
In stating reasons why appellant cannot complain of the order of the court in requiring him to produce certain books of account we should have said, in substance, instead of the language employed, that erroneous interlocutory orders which do not prejudice the rights of the party against whom made, are insufficient to reverse a cause on appeal. The original opinion has been so corrected.
It was not necessary to consider the cases cited by counsel for appellant from the court of appeals •and this court, which it is claimed hold that directors, when secured by the corporation they reperesent, have all the rights of creditors in enforcing their security. No question calling for a discussion of this proposition is presented. Appellant was not the mortgagee, and that is why it was stated in the original opinion, he had no personal interest to protect . ■ True, he was a co-endorser with the mortgagee of notes on account of which the mortgage was given to the latter as indemnity, but this was an immaterial fact, and therefore, not mentioned, because appellant was simply a bidder at a sale conducted for the benefit of another under a chattel mortgage to which he was not a party. It would have been more nearly accurate, as well as sufficient, to have said that appellant was not a party.to the mortgage,
At the original hearing onr attention was called to the fact that appellant, was ■ a co-endorser with the mortgagee of the company notes- and that the mortgage was given to indemnify them on account of such endorsement. And by reason of this personal liability it was then argued that appellant in dealing with his company might, to some extent at least, relieve himself of the duty which ordinarily is imposed upon a director of a corporation. But in the original briefs of. appellant .we do not find advanced some of the legal propositions which counsel, appearing for. the first time in support of this petition, now contends should be applied to the case, .because of that circumstance; we therefore decline to consider them. —Morgan v. King, supra.
The chattel mortgage has neither been ignored -nor impeached; but on the contrary, it is. upheld. Appellant has not been deprived of his purchase,, or of any money advanced on that account, but is sim.ply held responsible for the direct profits growing out of the transaction. This conclusion, based as it is upon, the particular facts in this case, does not in any manner conflict with any previous decisions of either the court of appeals or of this court, and' is abundantly .supported by authorities from other states. In fact, counsel for appellant in their briefs concede this to be. the law in other jurisdictions. They say: “There is only one theory and we concede that that theory exists in some states, namely, that by virtue of the fiduciary capacity of a director to a corporation, he is absolutely prohibited from bidding at a sale of the property of the corporation, even though it be sold at a judicial sale, or under a mortgage, or any other lien, unless he pays the full value of the property, to which an appeal- eould be made to in any way jeopardize the rights- of Fishel in this transaction.’-’
In the West case the only point actually decided, and the only one involved, was that an insolvent corporation might apply its property to the payment of its just debt to a creditor, and thus prefer the latter. In the course of the opinion the writer said: “The great weight of modern authority is to the effect that, as individuals, the officers of a corporation can loan it money, or legally, in any other proper way, become its creditors and deal with it in the same manner as with an outsider. If such is the law, — and it seems to be where there is no statutory prohibition, — it logically follows that the right to become a creditor carries with it all the rights of a creditor, and authorizes the corporation to prefer the officer if it sees fit. ’ ’
Upon the parts of this excerpt which we have italicized appellant bases his contention. And it is to be said that if the law is as there declared he ought to prevail, for the record shows that his every act in this transaction is covered by that declaration, and apparently he relied upon its protection. That these observations are dicta the facts as stated in the opinion abundantly show. That being true,
If in previous decisions of this court or the court of appeals anything contrary to this doctrine has been announced, it must give way. The cases cited in the opinion from this court foreshadow the doctrine herein declared, and it is well to recall to. the profession that this court, as at present constituted, adheres to the principles therein enunciated, and is not disposed to adopt the rule, which has been subject to much criticism, apparently sanctioned, though not authoritatively declared, in the West case, and for which appellant so strenuously contends.
Petition for rehearing denied.
Mr. Justice Steele not participating.
