70 N.J. Eq. 258 | New York Court of Chancery | 1905
The receiver of an insolvent corporation files this bill against the defendants, Hendershot, Welsh and Downs, three of the fonr
“Said salaries are to be paid from the profits of the business. The stockholders are to be paid a dividend of ten per cent, before anything is paid in salaries, and next in preference shall be the salary of O. B. Hendershot before any other salaries are paid.”
The certificate of organization did not refer to this agreement, nor did it contain the agreement in reference to the payment of dividends and salaries, nor was the agreement referred to or adopted at the first stockholders’ meeting to organize the company. But at the first meeting of the stockholders, Welsh, Hendershot and Stephens were elected the three directors, and at the first directors’ meeting a resolution was passed that the dividends and salaries should be as specified in the article of agreement, which was placed in the book of minutes of the company.
Cross-bills are filed by the defendant Stephens’ administrator; against Hendershot and by defendant Welsh against both Stephens’ administrator and Hendershot. The general object of each cross-bill is to establish against Hendershot a primary liability for the claims made by the receiver, or some of them, if established. This primary liability was claimed at the hearing as arising out of the contract relating to the postponement of salaries to dividends, and it is claimed that by reason of this agreement, Hendershot should be held primarily liable for the salaries received, so far as necessary to pay debts, before any decree for the payment of dividends.
The evidence shows the company, whose business had been ‘ unprofitable since at least 1897, was in serious financial difficulty in the spring of 1903, and that in August, 1903, the Pierce, Butler & Pierce Company, its largest merchandise creditor, with a claim of about $2,100, was pressing for payment and threatening proceedings in bankruptcy. In consequence of this, and for the purpose of closing up the business without the appointment of a receiver, an arrangement was made by which Hendershot
Stockholders are liable to the receiver for dividends paid out
The other stockholders, however, Hendershot, Welsh and Stephens, who were also the sole directors and officers of the company, as early as March, 1895, knew that the dividends were not páid from the profits, but from the capital. Their receipts of the dividends were therefore in fraud of the company and of its creditors, and a court of equity will not, on their behalf,
The defendants Welsh and Stephens’ administrator file separate cross-bills, based on the agreement of April 1st, 1892, relating to the payment of dividends before salaries. The cross-bill of Stephens’ administrator is filed against Hendershot and that of Welsh against both Hendershot and Stephens’ administrator. Neither the receiver nor the company is a party defendant to either cross-bill. Both bills make charges against Hendershot relating to the management of the business, but the whole relief claimed at the hearing rests on the enforcement of the agreement by declaring a primary. liability to the receiver on the part of Hendershot on account of Ms receipt of salaries under the agreement. Neither of the cross-complainants asks in this suit a decree against- Hendershot for the payment to themselves of the amounts withdrawn by him, or claim that there were any profits applicable to either dividends or salaries under the agreement after 1895, or at least 1898. Eor the reasons above given, the receiver is not at all entitled to an account of the salaries under the agreement for the purpose of
Stephens received no salary within six years from the time of filing the bill, and any claim of Welsh against him is outlawed. Hendcrshot’s salary was received with the assent of both Welsh and Stephens, who knew the financial condition of the company, but desired the continuance of the business by Hendershot, the only manager of the business for six years before the bill was filed. Neither of them, therefore, is entitled to recover back from Hendershot the salary for conducting the business, which they together controlled, and which salary both understood he was receiving. These payments, made by consent and with full knowledge of the condition of the company, cannot be recovered or brought into account on the ground that the payment allowed by themselves was a breach of the contract with them.
Treating the payments of salaries as coming within the scope of the contract, the contract-must, as to these payments, be considered as waived or abandoned. But I think that the sounder view is that these payments of salaries (at least those made after dividends ceased in 1900)_were not considered as payments controlled by the dividend. clause of the agreement, for by the agreement neither dividends nor salaries were to be paid except from profits, and from 1900 at least all parties knew that there were no profits to pay either dividends or salaries, and from this time at least the salary was by common consent treated as part of the expense of carrying on the business. If this view be correct it cannot now be recovered on the theory that it was intended by the parties as a payment out of profits under the
On behalf of Hendershot the claim is also made by answer, but not by cross-bill, for the enforcement of the contract alleged to have been made with him on the division of the assets that Stephens should pay $1,500 on the Clinton bank notes, and that Welsh and Stephens should take care of the balance due on these notes,' if the assets were insufficient. This enforcement is also sought by the indirect method of directing a primary liability on their part to pay any decree to the receiver. The receiver does not seek the enforcement of this contract or any rights thereunder, for his decree is based on the repudiation of its validity.- Any right, therefore, which Hendershot has against either Welsh or Stephens under such contract is a matter for enforcement by an independent suit, and not by a direction as to the order of liability for the receiver’s decree. The contract, moreover, if considered io be proved by Hendershot, establishes a liability which is purely legal and not equitable, and both Welsh and Stephens’ administrator are entitled to its establishment in a legal tribunal. In Headley v. Leavitt, 68 N. J. Eq. 591 (Court of Errors and Appeals, March, 1905), a claim under a similar contract was sent to a court of law for settlement. It should be further stated that as against the administrator of Stephens there is no evidence of his intestate’s contract to pay the balance due on the Clinton bank notes after paying thereon the value of the, goods taken by Stephens, except that of Hendershot, as to transactions between the intestate and himself. The evidence was objected to at the hearing, and being inadmissible under the Evidence act (P. L. WOO p. 363 § 4-) cannot be considered. On the answer of Hendershot, therefore, there can be no direction in the decree in the receiver’s bill that a primary liability, either for ihe Clinton bank notes or any other debt of the company, must lie first satisfied by either Welsh or the Stephens estate, because of this alleged contract on .the division of the assets. Decree will be advised in accordance with this opinion, and on the settlement of the decree I will hear parties as to a reference.