65 N.J. Eq. 582 | New York Court of Chancery | 1903
This is a creditors’ suit, brought to set aside a mortgage because it is said to have been given by the defendant, F. G. Otto
The material facts are these: On April 1st, 1900, the defendant corporation executed a mortgage for' $115,000 to the complainants, Zenas E. Newall and George R. Turnbull, to secure the payment of one hundred and fifteen boiids of $1,000 each. The mortgagees were to hold the property mortgaged in trust for the equal and proportionate benefit of the respective persons and corporations who should at any time own the bonds. At the time the mortgage was made the assets of the mortgagor amounted to $-177,534.46, the liabilities to $268,300.73. Among the creditors of the company were the East River National Bank, to which the company was liable to' the amount of $55,000, on notes made or endorsed for the benefit of Paillard & Company, and Raymond Jenkins, president of the bank, to whom the company was liable to the amount of $20,000, on notes made or endorsed for the .benefit of the same firm. The evidence shows that the corporation of E. G. Otto & Sons, and its predecessors, had successfully prosecuted the business of manufacturing music boxes and surgical instruments for many years. Among its selling agents was the firm of Paillard & Company. This firm, in the spring of 1899, had, it is alleged — through bad manage-' ment, become very much involved. It had then given over the control of its business to Gustav Otto, the president of E. G. Otto & Sons. It was apparently this that led to the endorsement by the corporation of the Paillard paper to the amount I have already stated ($75,000). On February 13th, 1900, Paillard & Company made an assignment under the New York Assignment law. Its liabilities amounted to $110,994.49 and its nominal assets to $144,945.57, but not more than $25,000 has been realized from sales. It has, however, other property, chiefly real estate; of what value does not appear. On the day the deed of assignment bears date, there was a special meeting of
The first question to be considered is whether the mortgage of $115,000- was made when the company was insolvent or contemplated insolvency. Section 6-1 of the Corporation act of 1896, which is a copy of the act of 1895 (P. L. of 1396 p. 166), provides as follows:
“Whenever any corporation shall become insolvent or shall suspend its ordinary business for want of funds to carry on the same, neither the directors nor any officer or agent of the corporation shall sell, convey, assign or transfer any of its estate, effects, choses in action, goods, chattels, rights or credits, lands or tenements; nor shall they or either of them make any such sale, conveyance, assignment or transfer in contemplation of insolvency, and every such sale, conveyance, assignment or transfer shall be utterly null and void as against creditors; provided, that a 6ona fide purchase for a valuable consideration, before the corporation shall have actually suspended its ordinary business, by any person without notice of such insolvency or of the sale being made in contemplation of insolvency, shall not be invalidated or impeached.”
Complainant’s contention is that at the time the mortgage was made insolvency existed, or was contemplated.. Of the $115,000 secured, $40,000 was for cash paid at the time; $75,000 was for pre-existing indebtedness. As to these there is this distinction: If a company be in fact insolvent, or if it contemplate insolvency, it cannot secure a pre-existing debt, whether the mortgagee have or have not notice. But if the mortgagee advance money to an insolvent company, or to a company contemplating insolvency, and take a mortgage at the time of the making of the advance, then, if he has no notice, his security will stand. In the ease at bar, it is perfectly manifest that the president of the bank had no notice of insolvency, if we give to the word “insolvency” its ordinary meaning. The carefully-prepared Yalden statement showed that the assets were more than double the liabilities, and if to those liabilities we add $55,000, representing the company’s liabilities on the Paillard notes, not included in that statement, and deduct the items treasury stock, $21,300, and experimental work, $11,306.27, the statement still shows that the assets exceeded the liabilities by over $200,000. So that the company did not appear to be insolvent in the sense that its assets were insufficient to pay its debts. Nor was it insolvent in the sense that it had suspended its ordinary business of manufacturing, for it was then actually'' engaged in manufacturing, and it continued to be so engaged for three years thereafter. It is clear, then, that the president had no notice of actual insolvency in either of the senses I have mentioned. It is also clear, as it seems to me, that the president of the bank had no notice that the company contemplated insolvency in either of these senses. To contemplate insolvency
As to the seventy-five bonds taken as security for the antecedent indebtedness, there are other relevant facts. These facts .were known to the company, but not to Mr. Jenkins. As I have said before, when the question relates to a mortgage, given to secure money paid at the time, notice must be brought home to the lender. It is otherwise when an antecedent debt is secured; then the only question is whether the company was, in fact, insolvent or was contemplating- insolvency.
On February 9th, 1900, the president of F. G-. Otto & Sons, at a directors’ meeting, reported that he had tried to get additional capital and had failed. The minutes state that, in
I have thus far shown that the company was not insolvent in the sense that its assets, ultimately, were not sufficient to pay its debts, and I have now shown that it was not insolvent in the sense that it was unable, or thought that it would be unable, to proceed with its ordinary business for want of funds. In point of fact, as I have said, it continued to conduct its business at a slight profit for three years after the mortgage was made. Counsel was compelled, under stress of these admitted facts, to take another ground, and that is, as I understand his argument, that on April 1st, 1900, the date of the mortgage, a large amount of paper, on which the company appeared as maker or endorser, had gone to protest. I dismiss from view the attachment said to have been issued by one Patterson on a claim for $600, because there is no legal proof that it was issued in April, 1900, or, indeed, that it was issued at all. Counsel argued that the fact that the company's paper had gone to. protest showed that it had suspended business in
It is obvious that the case at bar is, in its peculiar situation, quite unlike that before the chancellor. The fact that the notes of a manufacturing company have gone to protest may be, and often is, prima facie evidence of insolvency; but it is obvious that such evidence is open to explanation. The protest may have occurred by accident, or because it was intended, in good faith, to contest their validity, or because it was without funds to pay through some unexpected delay on the part of one or more of its own debtors to make prompt payment. If the note were paid or the claim successfully defended it could' hardly be asserted afterward that, for this reason alone, the- company was insolvent. And I do not think it could be said that if the company did not pay in cash but had sufficient credit to renew its notes, and did, in fact, renew them and went on with its business, it should be regarded as insolvent, if it also appeared that its assets exceeded its liabilities. It is obvious that the whole situation would have to be considered. Speaking of the principle which should guide a court in appointing receivers for insolvent corporations, Vice-Chancellor Van Fleet, in Atlantic Trust Co. v. Consolidated Electric Storage Co., 4 Dick. Ch. Rep. 402, in a passage quoted by the chancellor in the case I have just mentioned, said: “The principle which I think should control the court in the exercise of this power is this— never to appoint a receiver unless the proof of insolvency is clear and satisfactory and unless it also appears that there is no reasonable prospect that tire corporation, if left alone, will soon be placed, by the efforts of its managers, in a'condition
There were three banks which, on April 1st, 1900, held paper of Paillard & Company and of Otto & Sons that went to protest, either just before or just after that date. The East River bank, as has been already stated, held notes and bills amounting to $55,000, and its president held notes for $20,000 more. It was to secure these notes that the Otto company bonds, to the amount of $75,000, were given. So far as this bank was concerned, the indebtedness was satisfactorily adjusted. It had never threatened suit and the evidence shows that the arrangement looking to an adjustment of its claim was at least under way before the notes were protested. They were protested, no doubt, for the purpose of fixing the liability of the endorsers, of which there were several. The Hoboken bank held paper on which Otto & Sons appeared as maker or endorser to the amount of $31,792.60. The first of the notes held by this bank became due and was protested on February 15th; the last on April 10th. They were all secured by a mortgage made by Charles W. Cooley and Emma Cooley, dated March 19th, 1900; delivered on April 14th. One of the notes (for $9,250) had'been made by Cooley himself, and a complete settlement and discharge of the account was had on December 13th, 1901, a part of the indebtedness having been paid in cash and a part by transfer of the property mortgaged. Of the particulars of the notes in the Germania bank we know nothing. The treasurer of Otto & Sons testified that they were protested about March 1st, 1901, which is probably a mistake, and that they are still outstanding. In the absence of evidence to the contrary, and assuming that they were protested in March, 1900, it must'be concluded that they were satisfactorily provided for or secured.
Now, it seems to 'me that on these facts the insolvency of the company at the time the mortgage was given is far from
By section 42 of the act of 1849 it was enacted that in case of the insolvency of any company formed under its provisions the laborers in the employ thereof should have a lien upon the assets thereof for the wages due them, respectively, which should lie paid prior to any other debt, &c. It was held by Chancellor Green, in Bedford v. Newark Machine Co., 1 C. E. Gr. 117, that the company was to be deemed to be insolvent when it suspended business, and that the lien should be deemed to attach as of that time. He said: "The act respecting insolvent corporations under which these proceedings were instituted looks to the suspension of the ordinary business of the company or some overt act by which its insolvency can be ascertained and declared. The court cannot, upon an inquiry of this nature, undertake to investigate the financial ability of the company at previous periods, founded upon a mere failure to meet its engagements or upon the actual state of its finances, after its business has been suspended.” This language has been quoted with approval in subsequent cases. Delaware, Lackawanna and Western Railroad Co. v. Oxford Iron Co., 6 Stew. Eq. 193; Wright v. Wynockie Iron Co., 3 Dick. Ch. Rep. 29. If these decisions do not govern the construction of section 64, they at least suggest caution in undertaking to avoid securities given a considerable time before suspension of business.
To summarize: The evidence in the case at bar shows that Otto & Sons had up to May, 1903, carried on an established _ business of many years standing, successfully; that it did not
The complainant next contends that the mortgage is voidable under the principle of the cases of Owen v. Arvis, 2 Dutch. 23, and National Bank of Metropolis, v. Sprague, 6 C. E. Gr. 50. The precise point of objection is, first, that the mortgage gives the trustees the right, upon default, to sell the property .which the company then owned and which it might thereafter acquire, to the prejudice of the general and unsecured creditors. This question was decided in Lister v. Simpson, 11 Stew. Eq. 438; affirmed on appeal, 12 Stew. Eq. 595, 607. Yiee-Chancellor Yan Fleet said: “The question is this: Is the mortgage of a stock of merchandise, which by its terms permits the mortgagor to sell the property mortgaged in the usual course of business, and also provides that its lien shall extend to such goods as may be subsequently purchased to replace those sold, fraudulent, ipso facto, as to creditors?” He answered both questions
The second objection interposed on this branch of the case is that the mortgage provided that the trustees should certify and deliver the bonds secured thereby to or upon the order of the company. With or without this provision, this, in a mortgage of this kind, would be the usual course. The bonds would be delivered as the company would direct. I am quite unable to see how such a provision would per se, and aside from the use that might be made of it, render it fraudulent. I suppose that in the ease of most of the mortgages that are given by railroad or industrial companies, the bonds are sold or disposed of by the trustees under the direction of the mortgagor. The case in hand seems to me to be distinguishable from National Bank of Metropolis v. Sprague in two vital particulars — first, the mortgagor was not, as I view-the evidence, insolvent. In all the cases relied on (Owen v. Arvis, National Bank of Metropolis v. Sprague, supra; Dewitt v. Van Syckle, 2 Stew. Eq. 210) this was regarded as one of the controlling facts; second, the mortgage in the case at bar was given pursuant to an antecedent agreement with a particular creditor for the security of that creditor and of its president. In the case of National Bank of Metropolis v. Sprague, the mortgage was made to trustees without any purpose of then securing any particular creditor, but after it was executed the bonds were left in the hands of the mortgagors for distribution among their creditors, or for such distribution as they might choose to make of them, and then they were held in the air, so to speak, and used as a club with which to compel creditors to take them. There was some criticism based upon the fact that the $40,000 was not all paid at the time the mortgage was executed. It was in fact paid between April 1st and October 1st, 1900, as the company needed it. It was all paid while it continued to be a solvent and going concern. Under these circumstances, I can see no real re
It is next insisted that if the complainant’s judgment and execution be not a lien prior to the lien of the mortgage in all respects, it is at least, a prior lien as to some of the property sought to be mortgaged. It is argued that it does not cover after-acquired property purchased with money of the company derived from the sale of its merchandise or from book account, or money in its possession when the complainant’s execution issued. The case of New York Security and Trust Co. v. Saratoga Gas and Electric Light Co., 53 N. E. Rep. 758, and other like authorities, are relied upon to sustain this position. So far as the question of after-acquired property is concerned, that has been disposed of by the before-cited case of Lister v. Simpson. So far as debts due the corporation and money — that is, coin or bank bills — are concerned, the facts are as follows: The property was taken over by the trustees under the mortgage on May 8th, 1903. The first execution was issued by complainant on April 4th, 1902, and was returned unsatisfied. The second was issued on July 28th, 1902, and is still unexecuted in the hands of the marshal. The execution js not a lien upon choses in action. Whitney v. Robbins, 2 C. E. Gr. 360; Tantum v. Green, 6 C. E. Gr. 364. And no coin or bank bills are shown to have been in the possession of the company after the execution issued. The company had, no doubt, one or more bank accounts, but while we, in common parlance, speak of money in bank, in legal contemplation the bank stands toward its depositor as any other debtor. Even if the case made by the bill were broad enough to cover this question, I do not think the plaintiff’s contention could prevail. In the case of New York Security and Trust Co. v. Saratoga Gas and Electric Light Co., supra, a receiver had been appointed in supplementary, proceedings, and the contest was between him and a receiver appointed in a mortgage foreclosure suit on the same day. A different question was therefore presented by that case, and it is unnecessary to consider whether it be, or be not, in all respects consistent with Lister v. Simpson, supra.