Reed v. Helois Carbide Specialty Co.

64 N.J. Eq. 231 | New York Court of Chancery | 1903

Grey, V. C.

This is a foreclosure case. The complainants’ mortgage is disputed by the mortgagor company and by Frank A. Souder (a creditor of the mortgagor company), who holds a mechanics’ lien judgment against that company, entered subsequently to the making and recording of the complainants’ mortgage.

The testimony in this cause covers a much wider scope than is necessary to settle the questions raised by the pleadings. The only matters which, on this foreclosure suit, may pertinently be determined are the validity of the complainants’-mortgage, the amount due thereon, if it be found valid, and whether it is a prior lien to the judgment of the defendant Souder; «and on the cross-bill of that defendant, whether decree should be made that the complainant Reed should pay to'the defendant Souder the balance remaining due on his judgment.

All questions which have been contested and discussed on the argument touching the liability of the complainants as stockholders of the defendant company, or the ultimate adjustment of equities attending the issue of holding or surrender of the stock of the defendant company, must be considered and determined in some suit in which these matters may be properly in issue. They have no place in the present foreclosure proceedings, except the incidents attendant upon the application of the purchase-money of stock to the purchaser of land, and the subsequent inclusion of that purchase-money in the complainants’ mortgage. That point is dealt with hereinafter.

Taking up the questions disputable in this cause under the pleadings, the complainants’ mortgage, while admitted to have been actually executed with all the requisite formalties, is denied to have been made and delivered under any proper authority of the mortgagor company.

The mortgage was authorized to be made by a resolution adopted at a duly-called meeting of the stockholders, which met on the 21st day of May, 1898, pursuant to notice, and was attended by substantially all of the stockholders of the defendant company. The resolution directing the making of the mortgage was affirmatively voted for by all the stockholders there present, excepting Mr. Monroe, the holder of one hundred shares. The objection presently under consideration challenges the validity of the whole mortgage, on the ground that it was not authorized to be made and delivered by the board of directors. The single member who stood out at the stockholders’ meeting resisted the authorization of the mortgage because he opposed the securing to Reed and Boice, by mortgage, the moneys paid out by them for the stock of the company. This point will be considered hereafter. As to the non-authorization by the board of directors, it is true that no formal resolution of the board of directors directing the mortgage to be made is shown to have been passed. But it is proven that the meeting of the stockholders which authorized the mortgage was itself called by the board of directors for that purpose, and that the mortgage was, in fact, executed by the executive officers of the company, who were members of the board; that the common seal of the company was under the control of the board, was affixed to the mortgage, and that its execution was proven by the annexed oath of the secretary of the company, which declares, referring to- the mortgage,

“that said conveyance was signed, sealed and delivered as and for the voluntary act and deed of the said grantor for the uses and purposes therein expressed, pursuant to a resolution of the hoard of directors of said grantor.”

There is no dispute that the signatures attached to the mortgage are the genuine signatures of the executive officers of the company, or that the seal affixed is its corporate seal. There is no satisfactory negative proof to the effect that the board of directors did not, in fact, authorize the execution and delivery of the mortgage. It is entirely undisputed that part of the consideration of the mortgage was a substantial sum of cash, paid by the mortgagees into the treasury of the company coincidently with the delivery of the mortgage to them. This cash-money mortgage was received and apparently used for the benefit of the company.

Another consideration inducing the making of the mortgage was the securing of part of the purchase-money of the mortgaged lands conveyed to the company coincidently with the giving of the mortgage. This phase of the case is hereinafter discussed in detail. On the point now under discussion—the validity of the mortgage as a corporate act—it is pertinent, for the corporation accepted the conveyance of these lands, subsequently took possession of them, and improved them as its own. These incidents amount to a ratification of the acts of the company’s officers in purchasing the land. The giving of the mortgage was an incident in the purchase.

A corporation mortgage coming into existence under such circumstances cannot be challenged because of the mere absence of affirmative proof of the formal action of a board of directors of the company authorizing it to be made. In such cases, in- the absence of proof that it was unauthorized, it will be presumed that it was authorized. In re West Jersey Traction Co., 14 Dick. Ch. Rep. 63, and cases there cited.

The defendant Souder, who- is a creditor of the company, also attacks the mortgage as a whole, upon the ground that it is a fraud, in that it was bargained for and arranged between Captain Reed, a director and officer of the company, and the corporation itself, to secure-to him, in contemplation of insolvency, a preference in the payment of debts due to- him from the company, and lie cites section 64 of the General Corporation act (P. L. of 1896 p. 298) in support of this criticism, where it is declared that neither the directors nor any officer or agent of the corporation shall sell, convey or assign or transfer any of its estate, effects, dioses in action, goods, rights and credits, lands and tenements in contemplation of insolvenc)', and that every such sale, &c., shall be utterly void as against creditors.

This criticism, so far as it challenges the mortgage as a whole, cannot be sustained if there be any portion of the mortgage-money lawfully secured by it. A mortgage may be good for some component parts of the mortgage-money and. bad as to the residue. In Savage v. Miller, 11 Dick. Ch. Rep. 437, the court of appeals held a mortgage given to secure several distinct items of indebtedness to be valid as to some of them and invalid as to others. In the present case a part of the mortgage debt accrued for cash actually delivered by the mortgagees to the mortgagor company at the time the mortgage was given. The mortgage secures the payment of this mone3r, and to this extent at least was not given to secure the payment of a pre-existing debt, which is the sort of debt referred to by the above-recited statute.

The mortgage cannot be invalidated as a whole because of any of the attacks made upon it. It remains to consider ,the defendant’s contentions which challenge the amount of money which the mortgage secures.

The complainants insist that it is a purchase-money mortgage, securing the price of land coincidontly conveyed for a large part of its total amount; that another part secures the payment of moneys precedently advanced to enable the company’s business to be carried on, and that the residue—-$1,409.10—was cash paid by the mortgagees to the mortgagor on the delivery of the mortgage. The complainants contend that the mortgage is a valid security for the.whole amount expressed on its face. The ascertainment of the true sum due on the mortgage requires some examination into the relations of the parties which resulted in the creation of it.

The Iielois Carbide Specialty Company is a corporation organized under the laws of this state in December, 1897. Its business appears to have been the manufacture and sale of a patent lamp, which was thought to be a valuable improvement for the purposes of lighting. Its principal manufacture had been carried on at a factory in Clearfield street, Philadelphia, and it was proposed, in the early part of 1898, to purchase land at some location at or near Absecon or Pleasantville, and there to build new buildings, and remove its factory to that place. The complainants, Reed and Boice (Reed being the most active), became interested in selecting and securing a site for the location of the company’s proposed factory. It was agreed, in February, 1898, between the company and Reed and Boice that Reed should be made treasurer of the company; that one hundred shares of the company’s capital stock should be issued to Reed and Boice at $50 per share, and that the $5,000 due the company for this issue should be used in the purchase of a site upon which to locate the company’s factory. The one hundred shares of stock was issued on March 1st, 1898, to Reed under this agreement. Reed transferred fifty of them to Boice. Boice paid $2,500 (his portion of the $5,000) to Reed, and the latter proceeded to purchase lands on the site selected. Reed was after-wards, on May 2d, 1898, elected treasurer of the company. No money was paid into the company’s treasury for this issue of stock. Reed expended in the purchase of land for the company a very considerably larger sum than the $5,000 due to the company for the stock issued to him and Boice. He took all the titles in his own name, but does not appear to have claimed at any time that he held them for his own benefit; indeed, he admits he bought for the company, upon an understanding that he was to be reimbursed when he turned the land over. The company approved of his purchases, for it located its factory building on the site purchased by him, and proceeded to equip it for the manufacture of its lamps. Between February and April 18th, 1898, Reed had expended in the purchase of lands, for the benefit of the company, a total sum of over $1,000. On this last date—April 18th, 1898—two hundred and fifty additional shares of the capital stock of the company were issued to Reed, and it is contended by the defendant company and Souder that these shares were also issued upon an understanding that the purchase-money due the company for the stock should be applied or credited to the land purchased, made by Reed for the company, and for building to be paid for by him. It may be said here and now that there is no sufficient evidence to prove that there was any agreement between Reed and Boice, or either of them, and the company to the effect that the purchase-money of any stock issued to them, or either of them, by the company, other than the first one' hundred shares, should be applied in the purchase of land. Between April 18th, 1898, and May 9th of the same year disagreements arose between Mr. Eeed and the other directors of the company. On May 9th, 1898, the board of directors had' a conference with Captain Eeed, and arranged with him that a meeting of the stockholders should be called to authorize the giving of a mortgage to- him. The amount for which the mortgage was to be made was first spoken of as $16,000, which was understood to include the sum of $3,500, or thereabouts, of cash yet to be advanced by Captain Eeed. A notice was given for the stockholders’ meeting on May 21st, 1898, and, pursuant to the notice, a meeting was held and passed a resolution in these words:

“On motion- of Gen. Wright, seconded by E. A. Souder, the president and secretary of the board were authorized and instructed to execute a mortgage for $14,000 upon property of the company located in the borough of Eleasantville, town of Abseeon- and township of Egg Harbor, to Peter B. Reed et al., for money advanced and to be advanced to the company by him.”

When the mortgage came finally to be executed it was arranged between the parties that its total sum should be $14,000, a portion of which should be cash to be advanced by Captain Eeed upon the delivery of the mortgage.

Under the above resolution the mortgage of the complainants was made and delivered. It is dated the 25th day of' May, 1898; proved May 27th, 1898, by the oath of A. W. Bailey, secretary of the company, and was recorded'on May 28th, 1898, in Atlantic county clerk’s office. It is admitted that one of the objects of giving this mortgage was to enable Captain Eeed and Mr. Boiee to “go- out” of the company in every capacity in -which they were related to it, except the holding of ten shares each as stockholders. Under this arrangement Captain Eeed resigned the treasurership of the company and also from its board of directors, and surrendered to the company all of the shares pf stock held by him, except ten shares retained by him. Ten shares were also retained by Mr. Boice. These were the circumstances under which the complainants’ mortgage came into existence. Immediately thereafter the complainant Reed ceased to make any advances to carry on the corporation’s business, and it was thrown upon its own resources. The gentlemen who were then connected with it were obliged, from time to time, to make advances to the extent of over $23,000 to aid the company in carrying on its business. The straggle for life continued until November, 1898, when it appears to have bec-n abandoned. Shortly after that the defendant Souder recovered judgment, the company ceased all business and it was openly confessed that the corporation was insolvent.

■ The statutory prohibition against the transfer of assets of corporations which are insolvent, or in contemplation of their insolvency, first appears in the statute of 1829. P. L. of 1829 p. 58 § 2. It is entitled “An act to- prevent frauds by incorporated companies.” It continued to- be part of the statutory laws of this state until the revision of the year 1875. In the revision of that year this provision was omitted, but was re-enacted on the 5th of March, 1895. P. L. of 1895 p. 166. It is now part of the General Corporation act of 1896. P. L. of 1896 p. 298 § 64. A large number of cases, which are quite instructive upon the general principles of the law applicable to the erecting of preferences by officers of corporations, arose during the period between 1875 and 1895, while this prohibition was off the statute-book. A list of them may be found in the case of Savage v. Miller, 11 Dick. Ch. Rep. 438: That case itself arose upon a mortgage which was created before the act of 1895 re-enacted this prohibition. The mortgage presently under consideration is operated upon by the prohibition, and the question as to the amount, which it might rightfully secure must be determined with relation to it.

The prohibition is against transfers of the corporation’s property in contemplation of its insolvency. I do not understand ■this prohibition to- be applicable to conveyances made in good faith by the officer’s of a corporation at a time when the financial embarrassments of the company are such that its insolvency may be within contemplation, if, as incidental to* and essentially a part of, the conveyance made, a present consideration moves to the company. For instance, if a mortgage be given to secure the payment of money paid in good faith to the company coincidently with the delivery of the mortgage; or a purchase-money mortgage be given to secure the payment of the purchase-money of land conveyed to the company eoincidently with the mailing of the mortgage; or if property be in good faith transferred to the company, and its property, or money, be given in exchange therefor. In all such cases the value of the assets of the company is not. materially changed. It is as solvent after such a transaction as it was before.

In all business enterprises which are threatened with financial embarrassment, insolvency is necessarily within contemplation. It is very rarely, indeed, that the financial situation of a corporation is SO1 perfectly defined that it continues solvent up to a given instant, and is immediately thereafter insolvent. In almost all such cases there is a period of struggle, during which efforts are made to rescue the enterprise from threatened insolvency. These efforts are necessarily taken in contemplation of insolvency. The transfer of the corporation’s property, in order to convert it into money, may be the only means of averting the insolvency which is feared, and the capacity legally to make such instant conversion may be absolutely necessary to the financial salvation of the corporation. The officers of the corporation, who are most intimately acquainted with its present embarrassment and future prospects, are naturally the persons who would be most likely to furnish the money necessary to relieve the corporation from its threatened danger. Such transactions, carried out in good faith, for full consideration eoincidently passed to the corporation, seem to be a necessity. They are not “frauds by incorporated .companies,” to prevent which the statute above recited was originally passed. They are in no' way detrimental to creditors of the corporation,,for they have the same value of .assets' after such transfers of property as before. Any other construction would compel the immediate winding up of .pvery corporation whose financial affairs should become temporarily embarrassed. It would have no power to pledge assets for present loans, or even to make sales of its property for cash,, in order to meet a-present need for money, which, when met, would cease to be embarrassing, and carry the corporation over to a more favorable period, when all its obligations could readily be discharged.

It is upon this construction of the meaning of the statute that the validity of the complainants’ mortgage will be tested.

The first element composing the money secured to be paid by complainants’ mortgage is the money claimed to have been spent by the complainants in the purchase of land for the company. The moneys thus spent are divisible into two parts—one portion was expended as the payment'by Boiee and Reed for the one hundred shares of the capital stock of the company, issued to and held by them, which they had agreed with the company should be spent for the purchase of land for a site for the company’s factory; the other portion spent for the land was disbursed by Captain Reed, without express agreement that it was the purchase-money of stock issued, or to be issued, to him, and was, in fact, a voluntary purchase made by him for the benefit of the Compaq, but taking tire- title to the land purchased in his own name, thus securing himself for the moneys so by him voluntarily expended, whenever he should convey these lands to the company.

As to the first item, the money paid' for land in satisfaction of the debt which Reed and Boiee owed to the company for stock which it had issued to them, the mortgage cannot be held rightfully to have secured its repayment.' This is- true irrespective of the prohibitions of the statute against preferences. The money owing by Reed and Boiee to the company for its capital stock was the money' of the company. When they spent 'it, by the company’s direction, in the purchase of lands, it was the company’s purchase to that extent, no matter in whose name the title might have been taken. If but a single piece of land had been purchased for $5,000' with this money in Captain Reed’s name, equity would have compelled him to convey that piece to the company, without further compensation to him. What was done was that Boiee and Reed, on making this conveyance, received from the company a mortgage securing the repayment to them of the $5,000, which they had owed to the company for its stock, and which they had spent for the company in the purchase of the land. For this portion of the mortgage-money they gave no consideration whatever, except the surrender of the one. hundred shares of stock. ■ The transaction was that the complainants, being holders of one hundred shares of stock, which they had purchased from the company for $5,000, surrendered it to the company, and received security for the repayment to them of the $5,000. This course of procedure was in derogation of the rights of the creditors of the company, and also of the rights of all stockholders who had fully paid for the stock issued to them. Boney v. Williams, 10 Dick. Ch. Rep. 699. For this reason the $5,000 part of the complainants’ mortgage must be rejected.

The other portion of money expended in the purchase of lands was made by Captain Eeed out of his private funds, without specific agreement that it was an application of any money owing by him to the company. To the extent that he thus voluntarily advanced purchaseymoney, he was justified in taking the title in his own name to lands purchased, and in requiring from the company, when it accepted and received the title for those lands, that it should repay to him the purchase-money so by him advanced. Until such moneys were so repaid, or secured to his satisfaction, he might rightfully have retained and refused to convey the title. For moneys so expended by Captain Eeed for lands conveyed to the company eoincidently with the mortgage received from the company securing payment of those moneys, the mortgage must be held to- be good. To that extent the mortgage does not, in any proper sense, transfer the property of the company. It does not secure the payment of an antecedent debt, but was, and is, a purchase-money mortgage, the means by which the company acquired tire property. The estate of the company received an accession of assets by the conveyance which is equal to the obligation given in payment therefor by the mortgage. Creditors are not harmed, because the accession of assets balances the-obligation.

Another component part of the mortgage-money is the sum of $1,469.10, paid in cash by Captain Reed into the treasury of the company- as the balance to make a net sum of $14,000 at the time he took the mortgage. This was also an accession to the estate of the corporation, and was paid in upon the hope and expectation that it might relieve the company from its financial embarrassments. I do not understand that the statute prohibits a corporation which is in financial embarrassment from borrowing money or purchasing property in good faith, in the hope and expectation of relieving itself from threatened trouble, and conveying property or giving securities and pledges in consideration of such purchases or loans. Such transactions are undertaken and carried on for the very purpose of avoiding insolvency. As above stated, they do not, when conducted in good faith, lessen the assets applicable to the payment of the corporation’s debts, and they are necessary and useful aids in the restoration of its financial standing. The moneys paid in cash into the treasury of the company by Captain Reed on the delivery of the mortgage are rightfully secured by it.

Another portion of the mortgage-mone}r secured the advances which Captain Reed had, before the giving of the mortgage, made, from time to time, out of his own pocket to aid the company in the carrying on of its business. The company was indebted to- him on the day when the mortgage was made to the extent that he had theretofore made these advances. These items were totally disconnected from any of the incidents attending upon the purchase of the land. Captain Reed had no right to retain the company’s land, which stood in his name, until the prior debts owing to Mm by the company should be paid or secured. He had expended money for the general benefit of the company. For that expenditure the company owed him an unsecured debt. It was such an indebtedness as an officer of a corporation might not secure to- himself by a conveyance of its property in contemplation of its probable insolvenc}'". As to this portion of the mortgage-money, it is, therefore, a proper question whether the mortgage was taken in contemplation of the insolvency of the corporation. »

It is contended -that Captain Reed was not a director of the company when the mortgage was made. All the proofs go to show that his resignation was arranged as part of the plan for the giving of the mortgage. He was to “go out” of the company. An officer cannot lawfully arrange to have the debt due him from the company secured to be paid by a transfer of its assets, then resign a few days before the delivery of the prearranged security, and claim that when it was given he was not an officer of the company. Such a transaction is not in good faith, and will not be recognized in a court of equity.

It is also shown that at the time the complainants’ mortgage was taken there were outstanding debts owing by the company, notably that of the defendant Souder.

Did the complainants take their mortgage in contemplation of the insolvency of the defendant company?

Before Captain Reed took the mortgage he had become dissatisfied, he says; with the company, because he found it did not, in fact, own a certain patent, which he had been led to believe it did own. He also knew that the company was short of funds to carry >on its business, for he had been himself furnishing the money to pay its current expenses. He knew that a very large amount of stock had been issued from the treasury of the company at but fifty cent, of its par value, for he had himself taken a number of shares under such an arrangement. He knew that it was proposed, and at one-time agreed; that he and Boice; Doctor Roehford, the president of tire company, and Doctor Bailey, the secretary

“should take the $25,000 which remained in the treasury at fifty per cent, and sell it to their best advantage and reap the benefits and profit that they could get over and above the fifty per cent, which they paid to the company.”

This is Reed’s own testimony. Two hundred and fifty shares of the capital stock of the company was actually issued to him under this arrangement. All of these incidents go far to show that, in the latter part of May, 1898, the complainants in this suit contemplated a financial situation for the company which was extremely dangerous to its continued solvency. It was with this knowledge that’ the complainants’ mortgage was taken, securing, in part, an antecedently existing debt owing from the company to Captain Reed for previous advances made by him to aid the company in carrying on its business. It was a matter of debate as to whether Captain Reed should “go out” of the company and upon what terms, and it was quite clearly shown that his own opinion of the future prospects of the company were such that he refused to convey to the company the title to the land, which he admits he purchased for its benefit, unless upon terms that all of his expenditures of everjr character in and about its business, whether they were the proper subject of a mortgage or not, should be secured to him by mortgage. His quitting to' advance money led directly to the company’s failure, and this result was indicated when he took his mortgage.

It must be held that the complainants’ mortgage was taken in contemplation of the insolvency of the defendant company, and, so far as it secured the payment of a pre-existing debt, it was an unlawful transfer of its assets, in the nature of a fraud, and therefore invalid.

Questions touching the issue of stock to the complainants, or either of them, and their liability thereon as stockholders, I have not discussed, because they should be presented in a proper cause, which this foreclosure suit is not, save so far as these matters are above considered in their relation to the amount which might rightfully be secured by the mortgage.

The only other question remaining is the alleged priority of the judgment of the defendant Souder to the complainants’ mortgage. The judgment is a mechanics’ lien judgment. The complainants’ mortgage was on record when the suit was begun. Mr. Souder did not make Messrs. Reed and Boice defendants in his lien suit. A memorandum endorsed on the summons shows that he did not, as lien claimant, assert any priority against the complainants.

It is also claimed by Mr. Souder that the complainant Reed agreed to pay for the building for which Souder claimed his lien. This is flatly denied by Reed, and is in no way sufficiently proven. The debt was claimed by Souder himself to be a debt due him from the defendant company. No promise of Reed, in writing, to pay it is attempted to be proven. No .actual promise to Souder by Reed is proven eyen by parol. The proof is of Seed’s declaration to others. No such situation of affairs and ag-reements of parties are shown as would amount to a novation, whereby Souder exonerated the defendant company in consideration of Reed’s promise to pay. The claim of Sonder that Reed be decreed to pay his debt, set up in the 'cross-bill, must be refused.

If counsel can agree as to the totals-of the items of money which may properly he included within the complainants’ mortgage, as above indicated, a decree may be signed accordingly. If counsel are unable to agree, I will refer this matter to a master, to state an account of those items in accordance with this opinion. The testimony upon these points is somewhat detailed and obscure. The question of costs will he settled on advising final decree.