Bank of Montreal v. J.E. Potts Salt & Lumber Co.

• Decision Date: 19 February 1892
• Parties: BANK OF MONTREAL et al. v. J. E. POTTS SALT & LUMBER CO. et al.
• Court: Michigan Supreme Court

51 N.W. 512

90 Mich. 345

BANK OF MONTREAL et al. v. J. E. POTTS SALT & LUMBER CO. et al.

Supreme Court of Michigan

February 19, 1892

Appeal from circuit court, Wayne county, in chancery; CORNELIUS J REILLY, Judge.

Action by the Bank of Montreal and others against the J. E. Potts Salt & Lumber Company, and Henry A. Harmon and David Tisdale receivers, in the matter of the assignment of said company to foreclose a mortgage by the salt and lumber company to plaintiffs. The receivers appeal from a decree of foreclosure. Affirmed.

Bowen, Douglas & Whiting, for appellants.

Frederick T. Sibley, (Otto Kirchner and John H. Bissell, of counsel,) for appellees.

MONTGOMERY, J.

On the 24th day of November, 1890, the J. E. Potts Salt & Lumber Company was indebted to the complainants in divers sums aggregating about $560,000, and on that date executed a chattel morgtage to secure this indebtedness, and at the same time executed a real-estate mortgage to the same parties, securing the same demands. On the 29th of October a meeting of the creditors secured by these instruments was had, and it was decided to take steps to foreclose the mortgages, and have a receiver appointed. The present bill was filed for that purpose. The defendants Harmon and Tisdale were appointed receivers. They subsequently petitioned to be made parties defendant to the suit, and this petition being granted filed an answer in the cause. In the mean time, and immediately following upon the appointment of the receivers, the lumber company made a general assignment for the benefit of its creditors. The answer of the receivers admits the execution of the mortgages; leaves complainants to their proofs as to the amounts due them respectively; but raises, by appropriate averments, the propositions of fact and law stated in the defendants' brief, as follows: First. That the J. E. Potts Salt & Lumber Company, at the time of the execution of these mortgages and for a long time prior thereto, was wholly insolvent; that it had no hope of meeting its maturing indebtedness or continuing its business, and had, when the determination to give these mortgages was completed, ceased to be a going concern. Second. That when a corporation so becomes insolvent, and ceases to be a going concern, it is not legally competent to give preferences, by way of mortgage or otherwise, to any of its creditors to the exclusion of others; that it must distribute its assets pro rata among them all, and that the assets of an insolvent corporation become a trust fund for the benefit of all creditors alike. Third. That, as soon as a corporation becomes insolvent, its directors become trustees for all the creditors alike, and that this fiduciary relation will not allow them to prefer a director or stockholder to obtain any advantage over other creditors; and that any attempted preference, by way of mortgage or otherwise, is invalid, and should be set aside by a court of equity. Fourth. That the mortgages executed by the Potts Salt & Lumber Company on the 24th of November, 1890, taken in connection with the action of the secured creditors in procuring the appointment of receivers by a consent order, constituted, in the eyes of the law, an assignment for the benefit of creditors, with illegal preferences. These propositions state very fairly and clearly the questions presented in the record, with the exception that at the time the mortgages were given the defendant corporation had not ceased to be a going concern, nor are we satisfied that its officers had abandoned hope of continuing business.

1. It is not in this state unlawful for a corporation, although insolvent, to give preferences to its creditors by way of mortgage. Town v. Bank, 2 Doug. (Mich.) 530; Kendall v. Bishop, 76 Mich. 635, 43 N.W. 645; Turnbull v. Lumber Co., 55 Mich. 396, 21 N.W. 375. In the case of Town v. Bank certain creditors were preferred by the corporation in a common-law assignment. It was held that the corporation had the same right to prefer one creditor over another that an individual has. In Turnbull v Lumber Co. it appeared that the corporation was converting its assets into money as rapidly as possible, and paying only certain of the creditors. The corporation was at the time insolvent. Speaking of these acts of the corporation, Justice CHAMPLIN said: "It being insolvent, such action must result in the payment of some to the exclusion of others. Such conduct, although legal and proper before the bill is filed against it by a judgment creditor, whose execution is returned unsatisfied, becomes improper after the filing of such a bill. From this time on, no unsecured creditor is entitled to preference over others." In the...