Enterprise F. & M. Works v. Miners' Elkh'n Coal Co.

• Decision Date: 09 December 1931
• Citation: 241 Ky. 779
• Parties: Enterprise Foundry & Machine Works v. Miners' Elkhorn Coal Company, et al.
• Court: United States State Supreme Court — District of Kentucky

241 Ky. 779

Enterprise Foundry & Machine Works v. Miners' Elkhorn Coal Company, et al.

Court of Appeals of Kentucky.

Decided December 9, 1931.

1. Corporations. — Corporation is bound by acts of officer whom it holds out as authorized to represent corporation.

2. Corporations. — Corporation is bound by acts of officers or agents in regular course of business, without specific authority having been granted by directors, if directors thereafter appropriate benefits to use of corporation.

3. Evidence. — Officer executing contract, together with corporation, cannot assert ignorance of contents where there was no fraud.

4. Corporations. — Knowledge of contents by officers of corporation executing purchase contract and accepting property purchased is as matter of law imputed to corporation and codirectors.

5. Corporations. — Corporation can only act by and through board of directors.

6. Corporations. — Directors mortgaging or selling property of corporation to themselves have burden to show bona fides of transaction when transfer is questioned by corporation or creditors.

7. Corporations. — Officer of corporation who executed purchase contract containing title retention provision held chargeable with balance due, after corporation mortgaged property purchased to directors.

8. Chattel Mortgages. — Directors of corporation taking mortgage on certain cars recently purchased by corporation held not entitled to protection against seller as innocent purchasers, where contract for purchase, executed by one of directors, contained title retention provision (Ky. Stats., sec. 496).

It was not denied that the members of the board of directors had actual knowledge from president, general manager, and treasurer of the corporation, who executed contract for the purchase of the cars, that the corporation was indebted to divers persons, and the directors knew that the corporation had purchased the cars in question and was using them in its business. With this knowledge, the members of the board by exercise of ordinary care could have ascertained the existence of the corporation's indebtedness to the seller of the cars as well as the terms and provisions of the sales contract.

9. Evidence. — Whatever knowledge director has, or ought to have officially, will be imputed to him as individual.

10. Corporations. — Directors must act in most perfect good faith in conducting corporation's affairs.

11. Evidence. — Directors cannot deny information of things which it is their duty to know, and knowledge imputed to corporation will be imputed to director individually.

12. Sales. — Sales contract antedating Uniform Sales Act is not affected by it.

13. Chattel Mortgages. — Directors who took mortgage of corporation's property with notice of prior lien of conditional seller thereof held chargeable with conversion in purchasing property at sale under mortgage and in applying proceeds to payment of other indebtedness.

14. Chattel Mortgages. — One converting mortgaged property with actual or constructive notice imputed to him, as trustee, of existence of mortgage, is liable to mortgagee for reasonable value of property when taken.

Appeal from Johnson Circuit Court.

WHEELER & WHEELER for appellant.

KIRK & WELLS for appellee.

OPINION OF THE COURT BY JUDGE RICHARDSON.

Reversing.

The Enterprise Foundry & Machine Works on January 31, 1923, was a corporation with its residence at Bristol, Tenn.-Va., engaged in selling completely equiped mining cars. On the same day the Miners' Elkhorn Coal Company was a corporation engaged in the mining of coal with its chief office at Paintsville, Ky.

On January 31, 1923, the Enterprise Foundry & Machine Works, by written contract executed and delivered by it to, and accepted by, the Miners Elkhorn Coal Company, sold and agreed to deliver to it 27 mine cars complete, f.o.b. at Bristol, Tenn., at $94.51, per car, amounting to $2,551.77, which amount was paid, less $725.88, for which notes were executed and delivered by the Miners' Elkhorn Coal Company to the Enterprise Foundry & Machine Works; one for $50, another for $50, and a third note for $725.75, dated July 10, 1924. This provision was in the written contract between the parties:

"The title and ownership of the property described and specified herein shall not pass from the company until all payments regular or deferred, shall have been made fully in cash. Notes given or renewals thereof shall not be held to be payments until the notes themselves are actually paid. In case of default in any of the payments provided for above, the Company may repossess itself of the herein mentioned property, wherever found, and shall not be liable in any action of law on the part of the Purchaser for such reclamation of its property, nor for the repayment of any money or moneys, which may have been paid by the Purchaser in part payment for the said property, except as by statute provided."

The Enterprise Foundry & Machine Works delivered the cars as it agreed and endeavored to collect the balance due it. Failing to do so, it instituted this action to recover same and to enforce a lien on the 27 cars. Thereafter it sold its business and assets to the Enterprise Wheel & Car Corporation. By a proper pleading it was made a party with the permission to prosecute the action.

For its cause of action the appellant alleged in its petition the usual and necessary facts constituting its cause of action. In doing so it set out haec verba the contract between the Enterprise Foundry & Machine Works and the Miners' Elkhorn Coal Company. It further alleged that the Miners' Elkhorn Coal Company by its board of directors, Z. Wells, F.B. Preston, W.L. Preston, John Dills, and Mose Rice, with knowledge on their part of the existence of its written contract with their corporation, in March, 1927, executed and delivered to themselves as individuals a mortgage on the assets of the Miners' Elkhorn Coal Company, including the 27 cars, to secure themselves as indorsers on certain notes of their corporation, aggregating $7,000; that the mortgage was fradulently and collusively executed by them to hinder and to prevent the Enterprise Foundry & Machine Works in the collection of its debts against their corporation; that in pursuance to this arrangement they caused to be filed in the Johnson circuit court an action wherein G.B. Rice, F.B. Rice, Z. Wells, Mose Rice, F.B. Preston, W.L. Preston, and John B. Dills were plaintiffs and the Miners' Elkhorn Coal Company was the defendant; that judgment therein was procured by the fraud and collusion of the parties to the action; the property of the Miners' Elkhorn Coal Company was sold by the master commission of the court under a judgment therein, and the property purchased by E. Wells for their use and benefit; that thereafter it was sold by them to the Northeastern Coal Company, and the proceeds were applied by them to the debts of the corporation for which they were liable.

The Miners' Elkhorn Coal Company, Z. Wells, F.B. Preston, W.L. Preston, John Dills, and Mose Rice, filed their answer thereto and offered to file an amended answer. To its filing the appellant objected. The court sustained its objection and refused to permit the amended answer to be filed. It was not asked by them to be made a part of the record by an order of court, nor was it so made a part of the record.

On submission, on the pleadings and evidence, a judgment was rendered against the Miners' Elkhorn Coal Company and F.B. Preston for $785.25. The petition was dismissed as to Wells, W.L. Preston, John Dills, Mose Rice, and the Northeastern Coal Company. It was further adjudged that the appellant had no lien on the 27 mine cars. To the judgment dismissing the petition as to them and as to so much of it as adjudged that it had no lien on the cars, the appellant excepted and was granted an appeal which is now being prosecuted.

A major portion of the testimony in the case is the same as that which was introduced in the case of H.B. Rice & Co. v. Miners' Elkhorn Coal Co. et al., recently decided by this court and reported in 234 Ky. 580, 28 S.W. (2d) 783. Many of the facts and some of the questions presented for consideration in the present case are stated in that one. It is necessary for a consideration of the present case to state the additional facts and questions herein, which were not involved in it.

At the time the mortgage of the corporation on its property was executed and delivered by virtue of an order of the board of directors to themselves, in addition to being a director, F.B. Preston was president, general manager, and treasurer of the corporation. The Miners' Elkhorn Coal Company was at that time indebted to the Painesville National Bank in the sum of $7,000, $2,500 of which had been owing by the corporation for about five months, $3,000 about two months, and $500 for an indefinite time. The directors were indorsers of the notes of the Miners' Elkhorn Coal Company to the Paintsville Bank, except the $500 note. It was indorsed by F.B. Preston and W.L. Preston. When these three notes matured the directors executed to the bank their personal notes and left them with it covering the amount of the corporation's notes. Their personal notes were not dated, but after they were executed and delivered to the bank, they were merely attached to the three notes of the Miners' Elkhorn Coal Company. At the date of the execution of the mortgage the written contract between the two corporations for the sale of the 27 cars was neither acknowledged nor recorded.

The directors are here insisting that at the time the corporation executed and delivered the mortgage, they had no knowledge or information of the existence of applicant's written contract or its terms, between the Enterprise Foundry & Machine Works and the Miners' Elkhorn Coal Company, and that they are protected against the contract by the provisions of section 496, Ky. Statutes. They insist that at the...