Montgomery Web Co. v. Dienelt, 133 Pa. 585

Opinion,

Mb. Justice Mitchell :

Two questions are presented in this case: First, whether the transfer from the Aronia company to plaintiff was fraudulent in fact, as against the appellants; and, secondly, whether it was fraudulent in law.

On the first question, the verdict of the jury was in favor of the good faith of the transaction; but unfortunately it is without weight, as it was rendered under a charge which scarcely permitted any other result, and which was justly open to the exceptions taken to it. Fraud, as has so often been said, can rarely be proved by direct and positive testimony, and great liberality is always allowed in the introduction of evidence having a tendency to show it. “ When creditors are about to be cheated,” says Chief Justice Black in Kaine v. Weigley, 22 Pa. 188, “ it is very uncommon for the perpetrators to proclaim their purpose, and call in witnesses to see it done. A resort to presumptive evidence, therefore, becomes absolutely necessary, to protect the rights of honest men from this as from other invasions.” The present case followed the usual course. De fendants had to get their testimony from the other side, and from the circumstances, and were not able to make positive and direct proof of the fraudulent intent, but had to rely upon circumstances pointing thereto. In his charge, tbe learned judge took these up seriatim, and disposed of them summarily in the passages assigned for error, as follows: “ What facts are before you to show that there was any fraud in this transaction ? The mere fact that they [appellants] were not provided for would not in itself he fraud. Now, it appears that a paper was drawn up and signed by all the creditors except these particular parties. This was a perfectly legal transaction. If this transferring was not. done for the purpose of defrauding these particular creditors, it was perfectly proper.” And again: “ Now, the facts and circumstances related here to show fraud are, first, that they [defendants] were not thus provided for; and, in the second place, certain declarations made by the president .....in an affidavit..... [The jury] must determine from the facts before them, and from all the inferences to be drawn from these facts. Because defendants may lose their claim, is not evidence that they were intended to be defrauded.” This was not an adequate presentation of the case. It omits all mention of the facts that the failure to provide for defendants, to include them in the paper, or to give them notice of the proceeding, was intentional, always a cardinal point in the proof of fraud; and it makes no reference to the removal of the Aronia company’s goods without leaving enough to pay even the rent, to the fact that the transfer was made on the eve of a trial which was sure to result in a judgment in favor of appellants, and perhaps to other circumstances of suspicion. But the substantial defect of the charge is in its treatment of the items of evidence, one by one, without at any time directing the view of the jury to their united force. There probably never was a case of circumstantial evidence that could not be blown to the winds by taking up each item separately, and dismissing it with the conclusion that it does not prove the case. The cumulative force of many separate matters, each perhaps slight, as in the familiar bundle of twigs, constitutes the strength of circumstantial proof. This presentation of the case to the jury we unfortunately do not find anywhere, and, for want of it, we are obliged to sustain the third, fourth, and fifth assignments of error.

But, secondly, was this transfer fraudulent in law ? Here, again, the true point of the case has been unfortunately overlooked. The question is stated in the opiuion of the court to be whether a corporation can lawfully dispose of its assets without the assent of all its creditors, there being no actual fraud intended; and this is the question that has been argued hero by appellee. But it is only half the question, and the pinch of the case lies in the omitted portion: Can the stockholders of a corporation make such a transfer to themselves? The Montgomery company is substantially the Aronia company under a new name. More than half its stock is held by the old stockholders by virtue of their ownership of the old stock, without any other consideration. On the view of the question that appellees assume to be contended for, they have-argued that the same law as to the use of its assets to pay its debts should be applied to a corporation as to an individual, even to the extent of sanctioning preferences, and this might be conceded without really touching the case. But the illustration, if appropriate, is fatal to the appellee ; for, in the case of an individual, a transfer to his wife or his agent, or anybody who should merely represent himself under another name, would be unquestionably void against creditors. The only real difficulty in the present ease is whether the' stockholders are so completely severed, in the view of the law, from the corporation behind which they hide, as to prevent a creditor from asserting their identity in fact, for the purpose of securing payment out of property which was theirs under one name, and is still theirs under another. Is the Montgomery company so conrpletely a new and different person from the Aronia company that the law must close its eyes to the fact that the difference is a mere juggle of names? We do not think there is any compulsion to such legal blindness. Settled general principles, and the analogies of the law, are against such a contention. If the corporation had merely changed its name, there could have been no doubt of the continued liability of the property. As already said, a majority of the stockholders in the new company are simply the stockholders of the old company holding as such, and without other consideration. As to these, it has been a mere change of name. As to the other or new stockholders, it appears from the agreed facts that they were creditors of the old company, and hold their present stock solely in consideration of their former claims as creditors. They paid nothing else for it; and they must have known that the new corporation into which they entered in this way was not a new enterprise, in the regular course of business under the incorporation act of 1874 as it professed to be, but a new turn in the old enterprise, all of whose property was being practically handed over, not to them alone in payment, which they might, perhaps, rightfully have accepted, but to them in conjunction with their late debtors. Under such circumstances, they were bound to take notice of the nature of the transaction, and to know that equity would still regard the property as a trust for the payment of existing debts, and would follow it on behalf of creditors until it should get into the hands of innocent purchasers for value. Such purchasers they were not. The old stockholders were not purchasers for value at all; and the new stockholders were not innocent, for they knew, or were bound to take notice, of the taint in their co-adventurers’ title. We are of opinion that, as to the stockholders in the Aronia company, this was a transfer of property by a debtor with the retention of an interest in himself, within the settled rule of law that makes such transfers void against creditors, and that, as to the Aronia creditors who became new stockholders in the Montgomery company, they took with such notice as prevents them from claiming now as innocent holders for value against the appellants as execution creditors of the old corporation. It is not worth while to cite authorities for these principles. They are settled and familiar. The only question that can be made is upon their application; and the novelty in this, if there be any, is simply the novelty of circumstances. The only case of similar facts that has been found is Hibernia Ins. Co. v. Transportation Co., 13 Fed. R. 516; and in that the Circuit Court of the United States reaches a similar conclusion. “ This court holds,” says McCrary, C. J., “ that the sale by the Babbage company of all its property to another corporation, composed mostly, if not wholly, of the same persons, was fraudulent and void as to all creditors of the former company not assenting thereto..... The fair inference from the transaction is that the old company was about to be dissolved, and to cease to be. It was to be absorbed by the new compan}n This is the inevitable conseqrience of the formation of the new company, composed substantially of the same persons, to transact the same business, at the same places, and with the same property. By the transfer, the creditors of the old company were deprived of the means of enforcing their claims..... Equity will not compel the creditor of a corporation to waive his right to enforce his claim against the visible and tangible property of the corporation, and to run the chances of following and recovering the value of shares of stock after they are placed on the market.” And Treat, D. J., added: “A corporation.....cannot change its name, or assume the form of a new corporation, and thus escape its obligations.” The court drew a distinction between an individual and a corporation, as to parting with all its assets even for the payment of bona fide debts, and not only held the transfer void even irrespective of the identity of the stockholders, but held the new corporation liable to the creditors of the old to the extent of the assets so received. It is not necessary for us to go so far. We only hold that, under the circumstances, specific property of the old corporation may be followed, as in other cases of transfers fraudulent as to creditors.

It is said in appellee’s argument that the whole of the property of the Aronia company was not sold. But, in fact, the portion left was not enough to pay the landlord’s preferred claim for rent; and, as to this creditor the transfer was of all the available assets, and left him nothing within reach for payment of his claim.

Judgment reversed, and now judgment for defendant on the point reserved.

Case Details

Case Name: Montgomery Web Co. v. Dienelt

Court Name: Pennsylvania Court of Common Pleas, Montgomery County

Date Published: Mar 31, 1890

Citations: 133 Pa. 585; 19 A. 428; 1890 Pa. LEXIS 938; No. 444

Docket Number: No. 444