Conover v. Hull

• Decision Date: 14 January 1895
• Citation: 10 Wash. 673,39 P. 166
• Parties: CONOVER v. HULL ET AL. SAME v. BOSTON NAT. BANK OF SEATTLE ET AL.
• Court: Washington Supreme Court

39 P. 166

10 Wash. 673

CONOVER v. HULL ET AL.

SAME v. BOSTON NAT. BANK OF SEATTLE ET AL.

Supreme Court of Washington

January 14, 1895

Appeal from superior court, King county; J. W. Langley, Judge.

Actions by C. T. Conover, receiver, against Stephen P. Hull and James H. Woolery, sheriff, and same plaintiff against the Boston National Bank of Seattle and James H. Woolery, sheriff (consolidated), to enjoin defendants from further proceeding with an execution levied upon property of plaintiff's insolvent under a judgment rendered previous to his appointment as receiver. From a judgment for plaintiff defendants appeal. Affirmed.

Strudwick & Peters and Arthur, Lindsay & King, for appellants.

Struve Allen, Hughes & McMicken and White & Munday, for respondent.

DUNBAR C.J.

The Bennett-Hull Furniture Company is a corporation organized under the laws of the state of Washington, and for the last five years has been engaged in the furniture business in the city of Seattle. Since its organization H. J Hull has been its president, and H. F. Bennett its secretary and treasurer, and Alonzo Hull vice president, who was at the time of the commencement of this action one of its trustees. On March 13, 1894, Stephen P. Hull commenced an action on a note held by him, by serving summons and complaint on Bennett, as secretary and treasurer of the company, the service being made on the evening of March 13, 1894. The next morning Mr. Bennett notified the Boston National Bank, one of the appellants here, of the service of the papers in the Hull suit, and on the same day, March 14, 1894, the bank commenced its action by a similar service. No appearance was made by the company in either of these actions. On April 3, 1894, the company was in default in the Stephen P. Hull suit, but, by agreement between his attorneys and the attorneys of the bank, judgment was not entered until the next day, April 4th when the company became in default in the bank suit, and the complaints in both cases were placed on file, judgment entered, and execution immediately issued and placed in the hands of the sheriff, and at once levied. By further agreement between the attorneys for Stephen P. Hull and the bank, the levy of the Hull execution was returned as a prior levy. Said levy was upon the entire stock and fixtures of the company, which constituted the entire available assets of the company, practically all the book accounts and bills receivable of any value having been previously assigned to the bank. On April 5, 1894, application was made by one of the creditors of the company for the appointment of a receiver. On April 6, 1894, before said application was heard, Walter & Co., a creditor of the furniture company, demanded payment of its claim, represented by promissory notes, some of which were not yet due, and to enable suit to be brought the furniture company took up said notes, and gave a demand note instead, upon which suit was begun at once; and on the next day the furniture company filed its answer in said suit, confessing judgment, and judgment was entered and execution issued and levied immediately. On April 13, 1894, the application for a receiver was heard and granted, and the receiver at once commenced these actions to enjoin the appellants and defendants from further proceeding on such judgment and execution. He secured the decree that they had no right to the prior payment out of the property levied upon, to the end that the assets of the insolvent company might be equitably distributed by the receiver among all the creditors of said company. Decree was rendered in favor of the receiver in each case, from which this appeal is prosecuted.

Before adverting to the facts in this case, we will notice the law propositions involved. The discussion, especially the oral argument, assumed a wide range, and counsel for appellants with great earnestness, vigor, and ability assault what is frequently termed the "trust-fund theory," viz. the doctrine enunciated by many of the courts that the property of a corporation is a trust fund in the hands of the managers of the corporation for the benefit of its creditors, insisting that the theory is an illogical and unjust one, and that there should be no distinction made in this respect between the property of a corporation and the property of an individual. The respondent insists that this court has allied itself with the advocates of the trust-fund theory by its decision and announcements in the case of Thompson v. Lumber Co., 4 Wash. 600, 30 P. 741, and 31 P. 25. We will not, in this connection, discuss the question whether the facts in that case were similar to those in the one at bar. We, however, held on the legal proposition that a voluntary preference by an insolvent corporation was void; and that principle is the essentially distinguishing feature between the responsibilities and rights of a corporation and a private individual. A further investigation of the subject and of the authorities contents us with the rule announced in that case, and we are satisfied that it can be amply sustained, not only by authority, but by the clearest principles of right reasoning. To begin with, our statute law recognizes a distinction between the remedies of creditors as applied to their dealings with corporations, by providing for the appointment of receivers to take charge of the property of corporations under certain circumstances and conditions; and of course, after the receiver is appointed, the property is in the custody of the court, and the funds will be equitably distributed among the creditors; while the liberty of a private individual is in this respect in no wise circumscribed or controlled by law so far as statutory enactments are concerned, and his creditors are left to run a race of energy to obtain a vantage ground. The law having made this wise and equitable provision, it is the duty of courts of equity to see that the provision is carried out to some practical effect; and the reason for this distinction is manifestly a just one. The creditor of an individual debtor has more and better opportunities to keep himself advised concerning his debtor's business and financial standing. There are no limitations on the debtor's financial responsibilities. It matters not how little he may embark in the enterprise, he is individually responsible for the debts which he incurs, no matter how great the amount; and the creditor can safely disregard the particular business in which he is engaged, and rely on his individual estate, which he may know to be ample, and which, with the exception of a small exemption, must respond to his debts. All this outside of the fact that an individual is liable to recuperate his fortunes in the future, after he has failed, and that there is hope of his paying his debts, as long as he lives. But not so with a corporation. It is an artificial creature of the law. It is favored with certain limitations, and its responsibilities are only such as are made by statute. No matter what enormous debts it may incur, the stockholders are only individually responsible to their creditors for the amount of the capital stock which they own, and when the indebtedness incurred exceeds the amount for which the stockholders are responsible, then the unfortunate condition exists of a debt for which no one is responsible. If the venture of a corporation proves a successful one, the stockholders receive the benefit; if it prove unsuccessful, their liabilities, as we have before said, are limited. Hence it behooves the law to throw some additional safeguards in the interest of creditors around a business thus conducted, for when the corporation fails, and goes out of existence, all chance for compensation to the creditor is forever gone. When the corporation is dissolved,-as it will be dissolved when it no longer is a profitable enterprise,-the creditor finds himself struggling with a myth or a nonentity, and is therefore absolutely helpless. There is no sentiment, either, in cases of dissolved corporations, which prompts the stockholders in after years to pay off the debts which they incur in the prosecution of the business of the corporation, as there is in the case of individuals; and altogether it seems to us that no violence is done in making this sharp distinction between the debts of an individual and of a defaulting corporation. But, whatever may be said concerning the reason of this distinction, it has become so permanently ingrafted in the law that it cannot now be disregarded. It was decided in Bartlett v. Drew, 57 N.Y. 587, that the assets of a corporation are a trust fund for the payment of its debts, and its creditors have a lien thereon, and the right to priority of payment over its stockholders; that where the property of a corporation had been divided among its stockholders before all its debts had been paid, the judgment creditor, after the return of an execution unsatisfied, could maintain an action in the nature of a creditor's bill against the stockholder to reach whatever was so paid; and that it was immaterial whether the stockholder got it by a fair agreement with his associates or by a wrongful act.

In Hastings v. Drew, 76 N.Y. 9, the court said "The proposition is well settled that the stock and property of every corporation is to be regarded as a trust fund for the payment of its debts." The appellants cite section 864 of 2 Morawetz on Corporations, opposing this doctrine. That section seems to lay down the general proposition that a creditor of an insolvent corporation is entitled to pursue the ordinary legal and equitable remedies for the enforcement of his claims, unless he is restrained from doing so at the suit of the corporation or other creditors; that he could not be...