37 A.D. 203 | N.Y. App. Div. | 1899
The learned counsel for the appellants present the question upon this review whether the plaintiff acquired such an interest by her judgment in the tort action, which was rendered after the execution of the chattel mortgages, as will entitle her to participate in the fund that resulted from the sale of the mortgaged property, and which the judgment in this action directs should be recovered from the defendants. It is contended that she was not a creditor of the Genesee Iron and Brass Works at the time of the execution and delivery of the mortgages, and consequently has no standing whereby she can participate in the fund.
This case must be governed by section 48 of the Stock Corporation Law (Chap. 564, Laws of 1890), which is as follows: “No corporation which shall have refused to pay any of its notes, or other obligations when due, in lawful money of the United States,
The condemnation of this statute, which reaches this case, consists in a corporation making “ any transfer or assignment of its property, or of any stock therein, to any person in contemplation of its insolvency.” The statute is silent as to who can attack this transfer. It is fundamental that the plaintiff must have some right or interest in the property which he seeks to recover in an action. He may be a contract creditor, and if his claim is founded on a tort and its amount was undetermined at the time of the transfer, he is in a position, after having obtained judgment for the damages resulting from, the tort, to attack the transfer and share in the property of the corporation. (Kain v. Larkin, 4 App. Div. 209, 210, and cases there cited; Olney et al. v. The Conanicut Land Co., 16 R. I. 591.)
In the last case cited A. brought an action against the corporation for injuries resulting from the negligence of the corporation. Pending the action, the corporation, then insolvent, mortgaged its property to its directors for moneys advanced. A., after having recovered judgment, levied on the corporate property and filed a bill in equity to set aside the mortgage. Held, that A. was entitled to have the mortgage declared void as against him. Speaking of the company’s liability for tort the court says: “ We fail to see that it was any less the duty of the directors to protect these liabilities of the company than those arising upon contracts.”
In Marstaller v. Mills (143 N. Y. 398) it was held that a cause of action against a domestic business corporation created by its negligence could be maintained against the trustees holding corporate property for the purpose of distribution, and that the word “ creditors ” includes all those to whom the corporation was under any enforcible obligation at the time of its dissolution as well as those to whom it was indebted.
It follows, therefore, that assuming that the statute cited is to be
The learned counsel for the appellants cite Esmond v. Bullard (16 Hun, 65); Crouch, v. Gridley (6 Hill, 250), and Campbell v. Perkins (8 N. Y. 438) and kindred cases as sustaining their contention. These cases arose under bankruptcy acts or other statutes which expressly relate to the proving or payment of debts. And the courts held that a claim in tort was not, strictly speaking, a debt within the purview of those statutes. The Esmond case was affirmed in the Court of Appeals (sub nom. Losee v. Bullard, 79 N. Y. 404), but upon other grounds, that court declining to decide this question.
The assets of a corporation are a trust fund for the payment of its debts and obligations upon which its creditors have an equitable lien both as against the stockholders and all transferees except those purchasing in good faith and for value. (Cole v. M. I. Co., 133 N.Y. 164.)
This case answers the contention of the banks and of Mr. Stull that they should be permitted to hold the funds received by them because their claims were founded upon contracts entered into before the transfers or mortgages were executed and were just and equitable. They were not mortgagees in good faith; that is, they knew that the corporation was insolvent and that it was making the transfer of its property to them in contemplation of its insolvency. (Salt v. Ensign, 79 Hun, 107; Jefferson County National Bank v. Townley, 92 id. 172 ; Cole v. M. I. Co., supra.)
But it is said that the statute does not apply unless the transfer is fraudulent as to creditors, which the referee has not found and the proofs do not disclose; that the creditors were simply seeking to recover just debts which they were entitled to do as vigilant creditors. This contention is answered in Kingsley v. First National Bank of Bath (31 Hun, 335), where Judge Barker says: “ The statute declares the assignment or transfer void in case the same is made in contemplation of insolvency. The question to be determined is not one of fraud, or of an intent on the part of the creditor to obtain a preference in the payment of his debt; but the simple inquiry is was there actual or contemplative insolvency and a transfer of property for the benefit of creditors. If both these facts are established then the transaction is void.” (Citing many cases.)
It is further claimed that the statute itself does not apply; that it only relates to a transfer made by an officer, director or stockholder of the corporation and not the corporation itself. This view is too narrow (as Judge Finch said in construing another part of this same section) and is not warranted by the purposes of the statute or the evils it sought to remedy. A transfer of corporate property is never made strictly by that intangible thing, the corporation, but must of necessity be made by its officers and its agents, executed under the forms of law as was done in this case. (Troy Waste Manufacturing Co. v. Harrison, 73 Hun, 528; Harris v. Thompson, 15 Barb. 64.)
An exhaustive and learned opinion by the referee reviewing the facts and the law in this case has afforded us great assistance in reaching our conclusion, and we concur in that opinion. '
The judgment appealed from should be affirmed, with costs.
All concurred.
The following is the opinion of the referee:
Elbeidge L. Adams, Referee :
This action was brought to have certain mortgages given by the Genesee Iron and Brass Works to the other defendants, upon its real and personal property, declared void as against the plaintiff on three grounds: (1) That they were made and accepted by each of the mortgagees with the purpose and intent of hindering, delaying and defrauding the creditors of the Genesee Iron and Brass Works; (2) that at the time of the execution of said mortgages, the Genesee
So far as the plaintiff’s action is based on the first and third of these grounds, it cannot be maintained for want of proof. As bearing on the other ground upon which it is claimed that plaintiff may recover, viz., that the transfers in question were made in contemplation of insolvency with intent to give preferences, the following facts, are pertinent:
The Genesee Iron and Brass Works was incorporated September 28, 1888, to carry on the business of manufacturing and selling earthenware closets. Its capital stock was $50,000, and was all issued to Patrick J. Madden for patents. It would seem from the evidence, which is not very clear on this point,.that Mr. Madden afterwards conveyed to the company the real estate on West avenue, where the company did its business, as a further consideration for the stock issued to him. The patents were carried on the books of the corporation at $25,100, and the real estate at $18,000. The real estate was mortgaged when the company acquired it for $9,000, which was its full value. It does not appear what the patents were worth, if indeed they were worth anything. The chattel mortgages did not specifically name them, but it seems to have been understood by the three gentlemen who purchased the personal property sold on the foreclosure of the mortgage to the Flour City Bank, that the patents were included in the property purchased at the time, and for which they paid $3,900. The mortgagee’s agent who conducted the sale, swears positively that he did not sell, or pretend to sell, the patents under the mortgage, but that, on the contrary, he stated that those rights must, be aquired directly from the company'. It does not seem to me to be of much importance how the title to the patents was acquired. What is important is that the purchasers at the sale did acquire it, and that their bid of $3,900 was made upon the assumption that they were to acquire it. Mr. Sullivan, one of the purchasers, testified that most of the property they bought was for use in connection with the manufacture of the closets, to which the patents related, and would not be- available for any other closets.
It would seem that this .corporation began business on a fictitious •capital. As might be expected from such a beginning, the company •did not prosper. No dividends were ever declared on its capital ¡stock. The total expenses of the company for the first eight months •of the year 1891 were $6,362.93, and during the same period it purchased merchandise to the amount of $3,613,05, while the total sales for the same time were only $8,641.40. On the 24th of March, T892, the balance sheet showed the company to be in this condition :
Assets.
(Not including property mortgaged, nor patents.)
Open accounts due.............................. $1,359 37
(Of this amount $798 had been carried on the books . for some time.)
¡Cash in Flour City Bank.......................... 91
Cash in Commercial Bank......................... 9 62
Cash in hand.................................... 2 74
Due from D. H. Sullivan.............'.. .......... 15 57
Total..................................... $1,388 21
Liabilites.
(Not including Munson judgment.)
Accounts payable.........i..................... $4,399 26
Accommodation paper............................ 10,254 15
Other debts..................................... 608 68
Due P. J. Madden............................... 91 90
$15,353 99
On the 24th of March, 1892, the plaintiff recovered a verdict against the Genesee Iron and Brass Works in an action for damages for personal injuries, tried at the Monroe Circuit. The case had gone on the day calendar on the eighteenth of March; the trial commenced on the twenty-second or twenty-third day of March, and on the morning of the twenty-fourth, at the opening of court, the jury brought in a sealed verdict for $3,000, on which judgment for
On the same morning, between nine-twenty a. m. and nine-thirty a. m., there were recorded in the Monroe county clerk’s office mortgages on the corporation’s West avenue real estate to Sullivan, Morris & Jerome for $600, to Joseph A. Stull for $200, to the Commercial Bank for $5,000, and to the Flour City Bank for $8,000, and at the same time there were filed chattel mortgages covering all the company’s personal property to the same parties, with the exception of Stull, and for the same amounts.
These mortgages were all dated March 19, 1892, were executed by Patrick J. Madden as president, and were duly acknowledged by him the same day, before the same commissioner of deeds. They were authorized by a meeting of the board of directors, held March seventeenth, and were prepared and executed in the office of the ■company’s attorneys, Sullivan, Morris & Jerome. Mr. Sullivan, of that firm, said at the meeting of directors that he wanted a mortgage to secure his attorney’s fees in case the Munson case went against him. The meeting was not called in the regular way, and only three of the five directors attended it. At least one of the other two directors had no notice or knowledge of the meeting.
An execution issued upon the plaintiff’s judgment March 25,1892, at two-fifty-five o’clock p. m. was returned unsatisfied March 29,1892.
The sale under the chattel mortgage given to the Flour City ¡National Bank was held on April 2,1892. By arrangements between themselves, all the defendants shared in the proceeds of this saleara ■rata.
A receiver of the corporation was appointed on April 14, 1892, in an action brought by a creditor. The only money or property that ever came into his hands was a balance of ninety-one cents on ■deposit in the Flour City Bank to the credit of the company.
The corporate real estate was sold upon foreclosure of the first mortgage and no surplus was realized.
Upon this state of facts, it is claimed by the plaintiff that the mortgages to the various defendants were made by the corporation in contemplation of its insolvency, and so are void.
There can be very little if any doubt that the Genesee Iron and Brass Works was practically insolvent in March, 1892. Its assets
However this may be, I think it may fairly be said, in view of all
Having arrived at-this conclusion, we have next to consider the question whether these mortgages were within the inhibition of any statute which was in effect at the time they were made, for they were undoubtedly good at common law.
Prior to 1890 the statutory restriction upon transfers by corporations was as follows : “ Whenever any incorporated company shall have refused the payment of any of its notes, etc., * * * it shall not be lawful to make any transfer or assignment in -contemplation of the insolvency of such company to any person or persons whatever.” (Laws 1825, p. 450, chap. 325, VI ; 1 Birdseye Rev. Stat. 679, § 33.)
This statute was repealed in 1882 (Chap. 402, § 1, subd. 39), but again re-enacted in 1884 (Chap. 434) by the repeal of the Repealing Act. It was again repealed in 1890 by the Stock Corporation Law (Chap. 564, Laws of 1890), section 48 of which is as follows: ■“ No corporation which shall have refused to pay any of its notes, or •other obligations when due, in lawful money of the United States, nor any of its officers or directors, shall assign any of its property to any of its officers, directors or stockholders, directly or indirectly, for the payment of any debt; and no officer, director or stockholder thereof shall make any transfer or assignment of its property, or of any stock therein, to any person in contemplation of its insolvency; and every such transfer or assignment to such officer, director or ■other person, or in trust for them or for their benefit, shall be void.”
This again was amended on May 18, 1892 (Chap. 688, Laws of 1892, § 48), so as to read: No conveyance, assignment or transfer of any property of any such corporation by it or by any officer, director or stockholder thereof, nor any payment made, judgment suffered, lien created or security given by it or by any officer, director
The statute which was in force at the time the transfers in question were made was the one enacted in 1890, and not repealed until May 18,1892. It is claimed by the defendants that the statute does-not affect the transfers for two reasons : First, because i't does not prohibit transfers by the corporation itself, but only those made by an officer, director or stockholder; and, second, because the Genesee Iron and Brass Works had not “ refused to pay any of its notes or other obligations when due, in lawful money of the United States,” prior to the execution of the mortgages. In support of their construction of the statute, the learned counsel for the defendant banks contend that when an original statute, which in distinct terms forbade certain acts on the part of the corporation, and also on the part of its ' officers, is changed by omitting the prohibition against the acts of the corporation, leaving the prohibition against the acts of the officers in full force, and then is again amended so that once more the corporation, as well as its officers, is forbidden to do certain things,, it cannot be said that the legislative intent has remained precisely the same. This would be a technical construction of a statute which, being remedial in its purpose, should be liberally construed with a view to effectuating the intention of the Legislature, which was to-secure equality among the creditors of insolvent incorporations. (Throop v. H. L. Co., 125 N. Y. 530, 533.) The statute of 1890 is substantially the same as the one for which it was substituted. (French v. Andrews, 81 Hun, 274; affd., 145 N. Y. 441.) The language of the statute is not so precise as it might be, but it can mean only one thing, viz., that a transfer of the property of a corporation, made in contemplation of its insolvency, is void. This construction of the statute has quite recently been adopted by the General Term in the second department. (Troy Waste Mfg. Co. v. Harrison, 73 Hun, 528.) Counsel for defendants concede that this is an apparent authority against them, but they contend that it is not in harmony with the decisions of the Court of Appeals in several cases wherein a distinction between the acts of officers and the acts of the corporation is indicated. They cite Throop v. H. L. Co. (125 N. Y. 530, 534); Phillips v. Campbell (43 id. 271); Sheldon Hat Blocking Co.
I have examined these cases and they do not appear to me to con.flict with the case in 73 Hun.
The contention that the word “ thereof ” in the statute of 1890 relates to a corporation which has “ refused to pay any of its notes or other obligations when due in lawful money of the United States,” would seem to be disposed of adversely to defendants by Cole v. M. I. Co. et al. (133 N. Y. 164). That case arose under the Revised Statutes, but the language is quite similar. It might be claimed with just as much force that the words “ such company ” in the old statute refer to a company which “ shall have refused the payment of any of its debts.”
The learned counsel for defendant banks, while not conceding the insolvency, present or imminent, of the Genesee Iron and Brass Works, contend with much earnestness and equal ingenuity, that even if the company was insolvent, or contemplating insolvency at the time these mortgages were given, there is no proof that the mortgages were given in contemplation of that insolvency, but that, on the contrary, the evidence requires the finding that they were demanded by the banks and given by the corporation in the ordinary course of business, and so are within the principle of Paulding v. Chrome Steel Co. (94 N. Y. 339) and kindred cases. The evidence which it is claimed supports this contention is the testimony of Mr. Hathaway, the president at that time of the Flour City Bank, and of Mr. Pond, who was then cashier of the Commercial Bank.
Mr. Hathaway testified that on the 15th or 16th of March, 1892, Mr. Madden, president of the iron and brass works, came in and stated that they needed more money badly, and would secure the bank by a mortgage on their real estate on West avenue, and also, if required, on their personal property. The amount Madden mentioned was a few hundred dollars. Hathaway told him they could have the money upon giving that security, and the following day .Madden brought in two notes which Hathaway marked for discount to the credit of the company. These notes were dated March 17, 1892, and were made, one by Mary Egan, for $350 and interest, and the other by W. A. Granger, for $422.63 and interest, payable in three months to the order of the Genesee Iron and Brass Works.
Mr. Pond, of the Commercial Bank, testified in substance that Mr. Madden came to his bank and wanted a little additional loan, and it was agreed that his company should give a chattel mortgage which should cover its indebtedness to both banks. It is conceded that no additional loan was made to the company by the Commercial Bank after this arrangement. This testimony is corroborated so far ■as the transactions were within his knowledge, by the attorney for the Flour City Bank, and it must be considered as proved that an arrangement was made between the two banks and the company by which the latter agreed to give mortgages on all its property, real ■and personal, to secure its indebtedness to the former, and in consideration of which the Flour City Bank discounted a new note for $200. This, however, it seems to me, is far from saying that the transaction was an ordinary business transaction, without any thought in the mind of either party of the company’s impending disaster. It may very well be that the officers of the two banks were not aware of the company’s bankrupt condition nor of the disastrous effects of an unfavorable verdict in the Munson case. The statute, however, does not make the question depend upon the knowledge
It is also urged by the defendants that the facts of this case bring it within the rule which was thus stated by Judge Danforth in Pauldmg v. Chrome Steel Co. (supra): “ If they (the officers of the corporation) acted in pursuance of a previous contract, by which the company was bound, either in law or equity, or otherwise, under such circumstances that it could not have a choice, the condition of insolvency became of no moment, for it was not in contemplation, or in their minds. The intention in such a case must be referred to
There remains one other question to be considered: Is the plaintiff a creditor who can maintain this action ? The learned counsel for the Flour City Bank maintains that she is not, and quotes from the opinion in Esmond v. Bullard (16 Finn, 65), which was an action against trustees of a corporation in default of an annual report, as follows : “ The whole object of the statute (Laws 1848, ch. 40, sec. 12) is to protect persons voluntarily dealing with the corporation and trusting its credit, not to protect those injured by mere tort.” The statute referred to provided that the trustees of a corporation, in certain cases, “ shall be liable jointly and severally for all the-debts-of the company then existing and for all that shall be contracted,” etc.; and it was held that a liability for a tort is not a debt under a. statute which is to be construed strictly; it is not contracted, for it does not grow out of contract. The object of that statute, and of all statutes which impose a liability upon directors for the payment of claims of creditors, is said to be partly to induce the directors to do-their prescribed duties and partly to secure the company’s creditors from losses caused by the acts of those who have control over the company’s fortunes. (Morawetz Priv. Corp. § 908.)
The object of the statute prohibiting preferences by insolvent corporations is, as we have seen, to secure an equal distribution of the assets among all the creditors. Creditors of such corporations are not discouraged by the courts from obtaining such preferences as they may by diligence; the officers of the corporation may not, however, actively aid a creditor to secure payment before the others. The law declares all transfers made with that purpose utterly void — not void as against contract creditors only, but, I take it, as against any person who would be entitled to share ratably in the assets of the corporation, as they would be distributed by a receiver.
It has been uniformly held that the protection of the Statute of
The question is apparently a new one in the courts of this State, and with no authority constraining me, I am not inclined to hold that a, corporation may dispose of its property so as to defeat the claims of those who have been injured by its tortious acts, though it may not do so as to defeat the claims of its contract creditors. I prefer rather to follow the Supreme Court of Rhode Island which, in an action precisely like this, said : “ As trustees for creditors, we think the directors were as much bound to care for those who had given them notice of their claims by suits in case they should succeed in obtaining judgment as for those whose claims had been already ascertained. Their action was taken with full knowledge that these-claims might ripen into judgments entitled to payment from the-property of the company. We fail to see that it was any less the duty of the directors to protect these liabilities of the company than those arising upon contracts which the holders were not prosecuting to judgment.” (Olney v. Conanicut Land, Co., 5 L. R. A. 361.)
It follows that plaintiff is entitled to judgment declaring the mortgages void.
Judgment affirmed, with costs, on the opinion of Wabd, J., and' of the referee.