City Nat. Bank v. Goshen Woolen Mills Co.

• Citation: 35 Ind.App. 562,69 N.E. 206
• Parties: CITY NAT. BANK v. GOSHEN WOOLEN MILLS CO. et al.
• Decision Date: 08 December 1903
• Court: Indiana Appellate Court

35 Ind.App. 562

69 N.E. 206

CITY NAT. BANK

v.GOSHEN WOOLEN MILLS CO. et al.¹

Appellate Court of Indiana, Division No. 1.

Dec. 8, 1903.

Appeal from Circuit Court, St. Joseph County; Lucius Hubbard, Judge.

Action by the City National Bank against the Goshen Woolen Mills Company and others. From a judgment granting insufficient relief, plaintiff appeals. Case transferred to the Supreme Court under the provisions of Burns' Rev. St. 1901, § 1337j.

A. L. Brick and Miller & Drake, for appellant. Van Fleet & Van Fleet, for appellees.

ROBINSON, J.

The court stated the facts as follows: On the 7th day of January, 1896, the Goshen Woolen Mills Company, a corporation, executed to appellant its promissory note, payable on or before January 12, 1897, which note was indorsed by Edmund R. Kerstetter and James L. Kerstetter. That there is due on the note in principal, interest, and attorneys' fees $5,325.24. That at the time of the maturity of the note the Goshen Woolen Mills Company was insolvent, and was insolvent on January 5, 1897, for months prior thereto, and ever since has been insolvent. That at the time of the maturity of the note the appellee company had $23,000 indebtedness past due and unpaid, and which it was unable to pay, and assets $13,000. On the 9th day of January, 1897, appellees Edmund R. Kerstetter, James L. Kerstetter, Alice M. Kerstetter, Susan E. Kerstetter, and Edward Schilling were the directors of the Goshen Woolen Mills Company, end on that day Susan E. Kerstetter resigned as a director, in order that she might be preferred as a creditor of the company, and at the same time she assigned all her stock in the company to Alice M. Kerstetter in consideration that such assignee would pay to her just what Alice might realize out of the stock. That prior to the resignation of Susan E. Kerstetter, and while she was still a director, it was agreed by the board of directors that she should have a preference, and on the same day the deed of trust was executed with the active procurement of James L. Kerstetter, Edmund R. Kerstetter, and Edward Schilling; Alice M. Kerstetter, the fourth director, being then sick, and not acting. The deed of trust conveys to a trustee named all the property of the woolen mills company, and directs the sale of the property by the trustee, and the application of the proceeds in the following manner: (1) Payment of taxes, assessments, and expenses of the trust; (2) for work and labor; (3) the unliquidated debt of Van Fleet & Van Fleet, attorneys; (4) a note of $3,500, payable to Susan E. Kerstetter; (5) notes of $1,400 and $1,434.38, to the Elkhart National Bank; (6) a note to Alexander Gordon, $1,434.38, to the State Bank of White Pigeon, Mich., a note for $1,147.50, a note to the First National Bank of Hillsdale, Mich., for $1,606.50, a note to the First National Bank of Quincy, Mich., $2,868.75, a note to the Salem Bank of Goshen, Ind., $573.75, and a note to A. M. Lewis & Co. for $1,500; (7) any funds remaining to be paid to the grantor; (8) right to appoint a new trustee reserved to the grantor. The court further found that it was the intention of the woolen mills company and of the board of directors in the execution and delivery of the deed to secure the directors James Kerstetter and Edward Schilling whatever amount might be due to them for work and labor; also to secure the firm of attorneys named for the preparation of the trust deed, the claims of Susan E. Kerstetter and the Elkhart National Bank and the other parties and banks above named; that James L. Kerstetter was bound as an indorser on the notes held by the Elkhart National Bank, and James L. Kerstetter and Edmund R. Kerstetter were bound as indorsers on the other obligations held by the persons and banks named in the trust deed; that at that time Edmund R. Kerstetter was the president and James L. Kerstetter was the secretary, treasurer, and general manager of the woolen mills company, and at that time Edmund R. Kerstetter was the owner of $33,000 of the capital stock of the Elkhart National Bank, and was the cashier and manager of the bank, whose entire capital stock was $50,000; that James L. Kerstetter was the husband of Susan E. Kerstetter; that Edmund R. Kerstetter was the husband of Alice M. Kerstetter; that Edward Schilling was the salesman for the company, and the trustee named was a clerk in the Elkhart National Bank. It is further found that it was intended that appellant and other unsecured creditors, not mentioned in the deed of trust, should take no part of the assets of the corporation, and should be entirely unable to collect their debts, or any part thereof; that it was the expectation of the directors that the trustee would leave the actual possession, control, and management of the company in their hands, and would act as trustee nominally, and that the trustee would compensate the directors for their services in the care and management of the property as a part of the expenses of the trust; that at the time of the execution of the deed the woolen mills company had debts outside of the ones named therein to the amount of $7,000, including appellant's claim; that all the property of the company was continued in the possession and control of James L. Kerstetter, who continued to handle the business of the company as he had handled it before the execution of the deed; that the mill was idle when the deed was made, and had been idle for several months, and had been operated only a small portion of the time since May, 1893; that Schilling was employed by James L. Kerstetter to assist him in managing the property, and that Kerstetter and Schilling were paid for their services; that Edmund R. Kerstetter, James L. Kerstetter, and Edward Schilling, and the trustee were at the time of the execution of the trust deed, and ever since have been, insolvent, and that the directors of the woolen mills company, at the time of the execution of the trust deed, knew that the woolen mills company was insolvent, and had known of such insolvency for at least one year prior thereto; that James L. Kerstetter and Edward Schilling, under the employment of the trustee, were at the time of the commencement of this action converting the property of the company into cash, to pay their claims; that to further prevent appellant and other unsecured creditors from collecting their claims, the woolen mills company confessed a judgment in favor of Susan E. Kerstetter for $3,586.10, and a judgment in favor of the Elkhart National Bank for $2,924.76; that the debts due to Susan E. Kerstetter and the Elkhart National Bank and the other creditors named in the trust deed are bona fide debts of the Goshen Woolen Mills Company. As conclusions of law, the court stated: (1) That appellant was entitled to a judgment against the woolen mills company and Edmund R. Kerstetter and James L. Kerstetter for $5,325.24; (2) that as to the other appellees appellant take nothing.

It is insisted that the facts found show active and constructive fraud. The question presented upon the second conclusion of law is the right of the directors of an insolvent corporation to prefer themselves as creditors in a case where the votes of the directors preferred are necessary to make the preference. Of the five directors, one, Susan E. Kerstetter, resigned on the day the trust deed was made, after it had been agreed on the same day that she should resign and have a preference. But by this act she could not escape being counted an officer. Mallory v. Kirkpatrick, 54 N. J. Eq. 50, 33 Atl. 205. Of the four remaining directors, one took no part in the action. Of the three directors who authorized the execution of the deed of trust, two were directly preferred, and one of these and the third director were indorsers on most of the preferred debts. Savage v. Miller, 56 N. J. Eq. 432, 36 Atl. 578, 39 Atl. 665. The vote of each of the three directorswho did act was necessary to authorize the execution of the deed.

The question presented is not the right of a solvent corporation, continuing business, to execute a valid security to a director or officer; nor the right of a director or officer holding a security executed while the corporation was solvent to enforce such security after insolvency; nor the validity of a security given a director or officer in case of threatened insolvency, but given in consummation of a promise made to obtain means to continue business in a just and reasonable belief that the business may be thus continued; nor the right of an insolvent corporation to prefer one or more of its officers by a vote of its directors sufficient without counting the votes of those preferred. But the question here presented is whether a majority or all of the directors of an insolvent corporation may prefer each one of themselves to the exclusion of its other creditors. Not only were two of the directors acting directly preferred, but one of these and the third director were indorsers on most of the obligations preferred. A preference where the directors are indorsers for the insolvent corporation and a preference where the insolvent corporation is indebted to its directors differ only in that in the one case the directors are indirectly preferring themselves, and in the other they are directly doing so. Not only was one of the directors preferred an indorser on many of the preferred obligations, but a preference was given a bank, more than three-fifths of the stock of which was owned by this director. The finding shows that the claims mentioned in the trust deed were bona fide debts of the corporation. It is held that an insolvent corporation may prefer its bone fide creditors in like manner as a natural person, and the fact that such preference may inure to the benefit of directors or officers of the corporation does not make it invalid. Levering v. Bimel, 146 Ind. 545, 45 N. E. 775;Henderson v. Indiana Trust Co., 143 Ind. 561, 40 N. E. 516;...