Adams v. Kehlor Milling Co.

• Decision Date: 15 June 1888
• Citation: 35 F. 433
• Parties: ADAMS et al. v. KEHLOR MILLING CO. et al.
• Court: U.S. District Court — Eastern District of Missouri

35 F. 433

ADAMS et al. v. KEHLOR MILLING CO. et al.

United States Circuit Court, E.D. Missouri, Eastern Division.

June 15, 1888

Mills &amp Flitcraft, for complainants.

G. B Burnett and Dyer, Lee & Ellis, for defendants.

THAYER J.

1. Under the testimony in this case it cannot be said that the Kehlor Milling Company had become dissolved on June 1, 1885 within the meaning of section 744, Rev. St. Mo., and that the directors of the company then became statutory trustees of its assets by force of the statute. Insolvency alone does not work a dissolution of a corporation. Foster v Planning-Mill Co., 92 Mo. 87, 4 S.W.Rep. 260; 2 Mor.Priv.Corp. § 787, and cases cited; Manufacturing Co. v. Importing Co., 30 F. 864. The Kehlor Milling Company continued to hold meetings and transact business of various kinds for several months after June 1, 1885. A suit was pending against it at that time, in behalf of complainant, and judgment was obtained against it after that date. It must accordingly be held that it had not been dissolved in a legal sense, and that a practical dissolution had not taken place by a failure on its part to exercise its corporate functions. It follows therefore that section 744 of the Revised Statutes of Missouri does not affect the case, and that the liability of the directors must be determined solely with reference to the general rules of law governing the conduct of directors and managers of corporations.

2. The only question in the case involving any doubt or difficulty is whether the directors of the corporation against whom this bill is filed, acted lawfully in giving a preference to the estate of J. C. M. Kehlor in the sum of $21,500, which the milling company appears to have owed him at the date of his death. There seems to be no occasion to criticise the conduct of the directors in other respects; but, according to the view the court has taken of the case, the question last mentioned must be answered in the negative for the following reasons: J. C. M. Kehlor, in his life-time, had been a director in the corporation, and also its president and its largest as well as most influential stockholder. At various times he had loaned the milling company $21,500, which was unsecured at the date of his death. On the death of J. C. M. Kehlor, J. B. M. Kehlor, who was also a director, succeeded to the management of J. C. M. Kehlor's interest in the corporation, and was elected president in his stead. It became apparent to him and the other directors very soon after June 1, 1885, that the company was insolvent, and must liquidate its affairs and suspend business, and steps in that direction were at once taken. Thereafter certain personal property of the company was pledged, and money to the amount of $5,000 was raised and applied on the debt due to J. C. M. Kehlor's estate. Subsequently, at a meeting of the board at which only J. B. M. Kehlor and D. M. Kehlor (both brothers of the deceased) were present, a resolution was passed to make the balance of the debt due the deceased to-wit, $16,500, a mortgage lien on the mill and real estate of the company, and papers to that effect were shortly afterwards executed. Thereafter the mill and real estate of the company were sold by order of the board to J. B. M. Kehlor for the sum of $500, subject to incumbrances then existing on the property to the amount of about $60,000, including the mortgage in favor of J. C. M. Kehlor's estate. This transaction exhausted the company's assets, leaving the complainants' claim in the sum of $1,237 for over-advances made on consignments, which was then in litigation, wholly unpaid. During the period covered by these transactions, from June to December, 1885, which resulted in giving the unsecured claim of J. C. M. Kehlor in the sum of $21,500 a preference over other unsecured claims, the corporation was evidently insolvent, and that fact was known to the directors. During that period the board consisted of only three persons,-- two of whom were brothers of J. C. M. Kehlor, and one of whom acted as agent of his estate, and voted the stock by it held in the company. I have no doubt that J. B. M. Kehlor paid for the company's mill and real estate as much as it was fairly worth, and perhaps more than it would have brought at a forced sale in the open market at that time. The board of directors evidently desired to make the corporate assets pay as much as possible of the corporate indebtedness; but at the same time the evidence unquestionably shows a disposition on the part of the majority of the board to pay the claim of J. C. M. Kehlor in full to the exclusion of other unsecured claims that were equally meritorious. On the facts stated, which are substantially admitted, I am of the opinion that the directors of the milling company violated their duty in giving a preference to the estate of J. C. M. Kehlor.

The...