183 Pa. 450 | Pa. | 1898
Opinion by
On the 1st of October, 1891, there was issued to Orr B. Bovard, James C. Bovard, Amsley V. Parnell, R. F. Orr and James H. Chambers, as incorporators, a charter for the organization of the Monongahela Fire Clay Co. The purpose of the company was mining fire clay and coal, and manufacturing fire brick. The capital stock was fixed at $60,000,'which was afterwards reduced to $40,000. Before the issue of the letters patent, the two Bovards, Orr and Parnell were copartners, under the name of Bovard, Orr & Parnell. They had established a fire brick manufactory and were carrying it on. The property of the partnership consisted of four and a half acres of land in the borough of Monaca, having thereon erected a fire clay brick factory, outbuildings, office, boilers and machinery, everything necessary to the manufacture of brick; adjoining this, they owned about twenty acres of land underlaid with fire clay. All this property was conveyed to the corporation at a valuation of $32,000; in addition, the corporation agreed to assume the partnership liabilities then existing, amounting to $9,000, making the actual cost of the plant $41,000. There was sold cash stock, about $10,500, payable by instalments ; leaving at most a cash working capital, after payment of the $9,000 debts of the old partnership, only $1,500. On this basis the corporation commenced business about January 1,1892, the incorporators being elected directors. From the confused method of presenting the annual statements in these .paper-books, it is difficult to determine satisfactorily the amount of business done by the company; the statements were offered and marked as exhibits, but copies are not printed, only some of the items from them testified to by witnesses. We infer, however, from the testimony that the corporation manufactured and sold, including payment of freights, approximately about $20,000 worth of bricks annually. • The first step taken by the new company was to provide for the debt assumed; and it borrowed from Mrs. Orr $5,000, for which was executed on December 30, 1891, a mortgage; the money was applied in part payment of the $9,000 indebtedness; the company also, soon after borrowed on its notes for the. same purpose from the Lincoln National Bank of Pittsburg, $4,250; there was also borrowed on mote of the company from First National Bank of Beaver, $750. On all these notes J. C. Bovard, A. V.
On August 13, 1895, the plaintiffs filed this bill against the company and the four directors as defendants, averring among other facts and conclusions, that the judgment was without consideration, and given to prefer the directors as creditors, solvency of the company, mismanagement, a purpose to permit the seizure and sale of the corporate property for their individual benefit, concealment of the books and real condition of the company, and praying that a receiver be appointed to manage the property and take possession of its assets; further, that the $5,000 judgment be declared null and void.
To this defendants filed answer, denying mismanagement or intention to have the property sold, and averring that the judgment was lawful and just. Ten days after the filing of the bill the court appointed Elijah Stewart receiver, who duly qualified on his petition, September 16, 1895; an order for sale of the property was awarded by the court, and it was accordingly sold by the receiver for the sum of $5,000, subject to the first mortgage of $5,000 in favor of Mrs. Orr, which sale was confirmed absolutely by the court; July 2,1896, an auditor was appointed to distribute the balance in hands of the receiver as shown by his accounts .filed, but was directed to suspend the audit until: final event, on the proceeding in equity. On February 13,1897, the Lincoln National Bank was permitted to intervene as ■defendant .to the extent of its interest in the judgment. After full1 hearing,.the court found as facts : :
*455 1. That at the time the judgment note was authorized the company was insolvent, and known to be so by the directors.
2. That the directors authorized the judgment to be confessed to protect themselves as indorsers on the bank paper, thus securing a preference over other creditors.
Therefore the judgment was a fraud in law, and it was declared null and void as against other creditors.
From this decree the defendants appeal, assigning eight errors; all of them, however, in substance denying the correctness of the court’s two findings of fact and conclusion of law.
First, as to the finding relating to the insolvency of the company. That the business project at the foot of a lawsuit ended in business disaster may be conceded; but that fact does not establish insolvency prior to that date. When the company was organized it had a property fully worth, from almost undisputed testimony, $82,000; it received cash for stock, $10,500. It then had assets of $42,500, and was in debt the amount of the old partnership liabilities it had assumed, $9,000. It is obvious that a corporation with at most a working capital of $1,500, proposing to do an annual business of $20,000, with monthly payments of at least $1,200, and monthly receipts depending on the quickness of sales and collections, is in financial peril from the start; not necessarily of insolvency, but of inability to carry on business. It may be entirely solvent, in the sense, that its assets far exceed its liabilities, but, that it will be able to promptly pay its debts contracted in the course of business, is exceedingly doubtful. Here the first year’s business showed a small profit, the second, third and fourth years considerable loss; these were years of business depression peculiarly trying to enterprises of this kind; such times demanded of the stockholders the utmost harmony of action, that their property might be saved. A prompt ratable contribution of a comparatively small amount of money as working capital would have averted trouble. But instead of harmony, the plaintiffs and other dissatisfied stockholders commenced litigation by averments of record which must necessarily have alarmed creditors and caused public distrust; put their property in the hands of a court official, who with remarkable promptness knocks it down at a sale for a bid less than one fourth of what both sides allege was its market value, and the litigation now proceeds over the right to this fragment.
There is what is called in bankruptcy statutes an act of insolvency which authorizes proceedings to have the debtor declared a bankrupt; such as inability to pay debts contracted in the course of business, as they become due: Buchanan v. Smith, 16 Wall. 308. This may be called statutory insolvency, and majf' occur where the assets of the debtor largely exceed his obligations; in such case, a large estate may be turned over to the debtor after the law has discharged every liability. But insolvency generally signifies insufficiency of assets when turned into money to discharge existing indebtedness. In Bowersox’s Appeal, 100 Pa. 434, we held, that insolvency such as disqualified an administratrix from taking out letters on the estate of-
Neither, does the evidence warrant the second finding, that the judgment was intended as a preference to the officers themselves, and was therefore a fraud in law. The evidence of the two Bovards and the cashier of the bank conclusively shows it was given to secure the banks, because demanded by them. The directors had been indorsers of these notes for three years, the money had been loaned the company, not by the directors, but by the banks, and the lender was now exacting further security from the company, the borrower; and the implied threat was, not only would they refuse to renew but would proceed to obtain judgment against the company unless security was given; coiipled with the express promise however that they would continue to renew the paper if their demand was complied with. If the object of the indorsers was to prefer themselves as against other creditors, how could this have been best effected? Certainly by permitting the banks to obtain judgment by adverse proceedings against the company; there was but one lien then, the mortgage of Mrs. Orr for $5,000, and it was clear that the property would sell for at least $10,000; but this would have been
Ashhurst’s Appeal 60, Pa. 290, was a bill in equity between warring stockholders, heard before Strong, J., at nisi prius, and his opinion and conclusions of law affirmed by this Court, per curiam, on appeal. The company owned a very valuable property, but was largely in debt, and its property, real and personal, on the verge of seizure by the sheriff; a meeting of the stockholders authorized the directors to sell the property; the directors sold to themselves and paid a large sum; everything was fair and open, and the transaction was for the best interests o£ creditors and stockholders. The sale was held valid, Justice Strong in his opinion saying : “ There must be many things which directors can do for their individual benefit which are binding on a corporation of which they are directors. If they have advanced money I cannot doubt they may pay themselves with corporate funds. If they have become liable as sureties for the corporation, they may provide for their indemnity. And although, ordinarily, the law frowns upon contracts made by them in their representative character, with themselves as private persons, such contracts are not necessarily void. They are carefully watched, and their fairness must be shown.”
In Neal’s Appeal, 129 Pa. 64, this court decided: “ Where
In case of Oil Co. v. Marbury, 1 Otto, 587, the Supreme Court of the United States fully considers the application of the rule and holds thus : “ While i't is true that the defendant as a director of the corporation was bound by all those rules of conscientious fairness which courts of equity have imposed as the guards of dealing in such cases, it cannot be maintained that any rule forbids one director among several from loaning money to the corporation when the money is needed, and the transaction is open and otherwise free from blame. No adjudged case has gone so far as this. Such a doctrine, while it would afford little protection to the corporation against actual fraud or oppression, would deprive it of the aid of those most interested in giving it aid judiciously, and best qualified to judge of the necessity of that aid, and the extent to which it may safely be given.” And the conclusion of the court, after discussing the theory on which the rule rests, that is, that the directors are trustees, comes to the conclusion that: “When the lender is a director charged with others with the control and management of the corporation, representing in this regard the aggregated interests of all the stockholders, his obligation, if he becomes a party to a contract with the company, to candor and fair dealing is increased in the precise degree that his representative character has given him power and control.” That is, if the favored director was but one out of a board of seven or nine, his power to prefer himself would be minimized, and the transaction would not be so rigidly scrutinized as if he were one of a board of three.
In the case in hand, the number of directors was four, all of whom were indorsers on the notes held by the bank; they voted unanimously to authorize the judgment; having thus the maximum of power, the other stockholders have the right to the most
The time interpretation of the rule, as shown by our own cases and the weight of authority in the United States, is, that the
We are of the opinion, first, that the finding of fact in the court below that the company was insolvent at the date the judgment was authorized is manifest error, because not in accord with the undisputed evidence. Second, that even if the company was insolvent, and the directors knew it, at the date the judgment was given, under the facts proved, the conclusion that the judgment was therefore fraudulent and void is erroneous, because not in accord with the settled law.
The decree is reversed at the costs of the appellees, and it is directed that thp balance in the hands of the receiver be distributed by the auditor in accordance with this opinion.