Corey v. Wadsworth

• Decision Date: 31 January 1899
• Citation: 118 Ala. 488,25 So. 503
• Parties: COREY v. WADSWORTH ET AL.
• Court: Alabama Supreme Court

25 So. 503

118 Ala. 488

COREY v. WADSWORTH ET AL.

Supreme Court of Alabama

January 31, 1899

Appeal from chancery court, Morgan county; William H. Simpson Chancellor.

Creditors' bill by W. W. Wadsworth against Lorenzo Corey and another to have set aside and annulled as fraudulent and void certain transfers of its property by the Decatur Building Supply Company to the defendant Lorenzo Corey, and to compel the said Corey to account for the value of the assets of the Decatur Building Supply Company so transferred to him and appropriated by him. The material facts, as averred in the bill and answer and disclosed by the evidence, are as follows: Prior to 1887, the Decatur Building Supply Company was incorporated under the general laws of Alabama, Decatur being the place of its business habitation. Wadsworth, the complainant, had, at various times, between the latter part of the year 1887 and May 19, 1888, sold and shipped to the Decatur Building Supply Company lumber and shingles. In payment of the lumber and shingles, the supply company gave to Wadsworth several drafts, which were not paid, the aggregate sum of the said several drafts amounting to $1,400 all of which were past due when the bill in this case was filed, in January, 1891. In February, 1888, Lorenzo Corey one of the defendants, became a stockholder in the Decatur Building Supply Company, and thereafter he became a member of the board of directors and president of said company, which position he held at the time of the occurrence of the matters and transactions now complained of. On May 15, 1888, the said Lorenzo Corey, together with other officers and stockholders of the Decatur Building Supply Company, entered into an agreement with the Exchange Bank of Decatur, by which they bound themselves, as sureties or grantors of the said Decatur Building Supply Company, for the payment to the bank of such indebtedness as said company might incur, not exceeding $6,000. By the end of June, 1888, the bank had loaned to the building supply company the sum of $6,000, and took its notes therefor. These notes were subsequently paid by Corey. One Hoy, the brother-in-law of Corey, was the vice president and general manager of the Decatur Building Supply Company. From the 19th to the 23d of July, 1888, said building supply company, through its directors and officers, sold a large part of its stock in trade, consisting of doors, sash blinds, etc., to Corey, in consideration or in payment of a debt of $6,000, and in alleged payment of their indebtedness which Corey claimed said company owed him. At the time of the transfer of this property to Corey, the Decatur Building Supply Company was insolvent, and within three or four days after the consummation of the transfer to Corey, on, to wit, July 26, 1888, the Decatur Building Supply Company, acting through said Corey as its president, assigned all of its remaining assets to the trustee for the benefit of its general creditors. The total indebtedness of these general creditors amounted to more than $22,000, and they received not more than 15 per cent. thereof from the property and assets of the corporation conveyed in the deed of assignment. It was further shown by the evidence that, while the Decatur Building Supply Company was in an insolvent condition, Corey procured it to order a lot of sash, doors, and blinds, although they were charged to the company, and that at various times he received goods from the company without being charged therefor. The bill was amended so as to make it a bill in behalf of the complainant and all other creditors of the building supply company who might come in and make themselves parties complainant and assume their proportionate share of the costs. Under this amendment, several creditors of the supply company were made parties complainant. The other facts of the case necessary to a full understanding of the decision on the present appeal are sufficiently set forth in the opinion. On the final submission of the cause, on the pleadings and proof, the chancellor rendered a decree granting the relief prayed for, and ordering said conveyance to the defendant Corey to be set aside and annulled, because fraudulent and void as to the creditors of the Decatur Building Supply Company. From this decree the present appeal is taken, and the rendition thereof is assigned as error. Affirmed.

Harris & Eyster and Speake & Russell, for appellant.

E. W. Godbey, for appellees.

McCLELLAN C.J.

One of the main questions in this case is whether an insolvent and failing corporation can make a valid transfer of property to one of its directors in payment of a debt owing from the corporation to him, thus preferring him to other creditors in the payment of its debts, or, perhaps, more accurately, whether directors of such corporation can prefer themselves in the payment of corporate debts. The writer not only has very affirmative views favorable to the validity of such a transfer on abstract principles, but he is further quite convinced that the point has been to all intents and purposes so decided by this court. We are, of course, aware that many courts have held the contrary view, and some of the text writers have strongly condemned the doctrine we believe to be absolutely sound; some of them, indeed, resorting largely to invective and epithet in denunciation of the idea that a corporation may pay a just debt to an honest creditor, though he be a director, in preference to the just debts of other honest creditors, who are strangers to the corporation. We have no epithets to apply to such courts and writers, nor to the rule they declare. Many of them are able expounders of the law, and all of them are doubtless actuated only by a purpose to ascertain and expound the true principle in this connection. And they may be right, and we wrong; but we do not think so, and we shall endeavor to give the reasons for the faith that is in us.

We are utterly unable to conceive, upon any just and sound principle or consideration, the least shadow of difference or distinction between the debt of a director and the debt of a stranger against a corporation, upon which could be predicated one rule in respect of a preference by the corporation in the payment of the former, and another rule in respect of such preference in the payment of the latter.

Take the case we have here, assuming, for the discussion of the point immediately under consideration, that the transaction involves no actual fraud. The corporation is a going concern, and its managers do not contemplate its failure. But it is in debt, and needs money to continue its business and to pay its maturing obligations. It borrows the money from a director, directly or through a pledge of his credit. At the same time it incurs debts to strangers for supplies necessary in its business. The money borrowed from the director is used for corporate purposes. It is paid out to other creditors, or is applied to liquidate corporate expenses. So, also, the supplies constituting the consideration of the debts to strangers are applied to the authorized uses of the corporation, and inure to its advantage. There is nothing covinous in the creation of either class of debts. Neither the advancing director nor the supplying stranger has any intention or expectation at receiving any undue or illegal benefit from the transaction he thus has with the corporation. It may well be that the director, being a stockholder, anticipates that the aid he gives the corporation in his individual capacity will redound to his advantage ultimately in the increased value of, or in dividends upon, his stock. But, as all debts must be paid before the stockholder can be benefited by such a transaction, the intention and expectation of the advancing director involves and presupposes the payment of all corporate indebtedness. It follows obviously that, in lending his money or credit to the corporation, the director can have no purpose or intent inimical to existing or future creditors, but, to the contrary, the primary effect of the aid he thus gives the company is of affirmative benefit to its creditors. The stranger creditor, to the contrary, does expect a direct profit to himself by the transaction in which he becomes its creditor. If he lends it money, he expects and contracts for interest, and even this remuneration does not inure to the director who pledges his credit. If he sells his wares to it, he expects and contracts for a profit upon them. Of course, all this is perfectly legitimate. But it shows that, so far as the expectation of benefit goes, the director who pledges his credit, as did the respondent here, stands in a less selfish attitude towards the corporation and its creditors than does the stranger who sells property to it on credit. And, at least, we may say that the director creditor and the stranger creditor-the respondent and the complainant in this case-stand, in the creation of their debts, equally untainted of wrong done or intended; and, regarded from the point of view of the inception of their claims, are equally, and to like extent, entitled to the favorable consideration of the courts and the just protection of the law.

It is equally clear that the corporation itself and its other creditors are, to say the least, as much benefited by the money it borrows on the individual credit of the director as by the wares it purchases on time from the stranger. As we have seen, both the money so borrowed and the property so purchased become assets of the corporation, enable it to prosecute its business, to pay its creditors, and to meet its expenses. There is, in other words, nothing in the uses to which the money borrowed and the property purchased are applied, or intended to be applied, which differentiates...