Federal Chemical Co. v. Paddock

• Decision Date: 27 March 1936
• Citation: 264 Ky. 338,94 S.W.2d 645
• Parties: FEDERAL CHEMICAL CO. v. PADDOCK et al.
• Court: Kentucky Court of Appeals

94 S.W.2d 645

264 Ky. 338

FEDERAL CHEMICAL CO. v. PADDOCK et al.

Court of Appeals of Kentucky

March 27, 1936

Rehearing Denied June 16, 1936.

Appeal from Circuit Court, Boone County.

Action by the Federal Chemical Company against Ben Paddock and others, wherein defendants filed demurrers and wherein plaintiff filed demurrers to defendants' answer. From an adverse judgment, plaintiff appeals.

Reversed.

Rogers & Rogers, of Covington, for appellant.

John L Vest and Vest & Vest, all of Walton, for appellees.

RICHARDSON Justice.

The Boone County Farm Bureau was incorporated February 7th, 1920. Its articles of incorporation set out the nature of the business proposed to be transacted, promoted and carried on to be a county-wide organization for the purpose of promoting the development of the most profitable and permanent systems of agriculture, providing a medium of exchange of farm products, the purchasing and selling in quantities for the benefit of the agricultural interests, and the doing of all things necessary to the business interests of the farmer. They contain these provisions: "The highest amount of indebtedness or liability which the corporation may at any time incur" is $10,000; "the private property of the members of the corporation will not be subject to the payment of the debts of the corporation," and "a board of directors of not less than five or more than fifteen members shall conduct the affairs and business of the corporation." The articles did not provide for the issuance of stock of the corporation of any value. After the corporation acquired title to land and a building in which to conduct its business, it immediately began to, and continuously thereafter, until some time in 1931, engaged in buying and selling to its members and the general public "all kinds of hay, mill feed seeds, fertilizers, coal, etc." It had no capital and engaged in business on borrowed money from its organization until December 16, 1931, when it made a general assignment of all of its property for the benefit of its creditors. Its annual business ran from $35,000 to $65,000, or a half to three-quarter million dollars from the time of its organization until its assignment for the benefit of creditors. The bureau federated itself with the Kentucky State Farm Bureau and the National Farm Bureau of the United States. It collected $6 annual dues from its members; $2 of which was turned over to the State Farm Bureau; 50 cents to the National Farm Bureau; and the balance it retained. It put on numerous exhibitions under the supervision of these bureaus and the Extension Department of the University of Kentucky.

The Federal Chemical Company, a corporation, on the 26th day of January, 1931, the 2d day of February, 1931, and the 3d day of April, 1931, sold and delivered, at the customary market price, fertilizer to the Boone County Farm Bureau, amounting to $1,078.70, of which $83.25 was paid, leaving due $995.45. At the time it sold the fertilizer to the bureau, Ben Paddock, E. H. Surface, Sterling Rouse, J. Bert Rouse, and Ross Russ, were its directors, in charge of its affairs and business. In actual charge of its purchases and sales of merchandise was a general manager who was subject to the authority and direction of the board of directors. The Federal Chemical Company's contracts for the sale of the fertilizer were made by its salesman with its general manager. The bureau failed to pay for the fertilizer as it agreed to do. After it had made an assignment to Sidney Smith, assignee, for the benefit of its creditors, its insolvency developed. This action was brought to recover the balance of the Federal Chemical Company's account of the members of the board of directors in office and in charge of its affairs and business at the time it sold and delivered the fertilizer to it. Its petition, in addition to alleging that the board of directors had negligently violated the provision of its articles of incorporation limiting the amount of its liabilities to $10,000, in that they had suffered and permitted the corporation to be and become indebted to the amount of $13,500 or $3,500 in excess of the highest amount of its debt limit, sets forth a sufficiency of the foregoing facts in the usual language necessary to constitute a cause of action against the members of the board of directors. It prays judgment against each of them for the $995.45, with interest from May 1, 1931, and costs.

Each of the defendants demurred to the petition, which was overruled. To this ruling we shall hereafter advert. The first paragraph of the directors' answer merely denied they "wrongfully, unlawfully, carelessly, negligently or in violation of the articles of incorporation, suffered and permitted the bureau to become indebted to other persons in excess of $10,000.00," or "that as a result of the alleged wrongful acts of the defendants," or any one or more of them, "jointly and severally are liable to the plaintiffs." This form of denial is insufficient to constitute a denial that the corporation was by them "suffered and permitted" to become indebted in excess of $10,000. The second paragraph alleged that the bureau "was a mutual organization of farmers and does not now have, and never has had, any capital stock," and that in 1922, it became indebted in the amount of $10,000, and that at all times since that date it had been continuously indebted in an amount in excess of $10,000, and that this successive indebtedness was fully known to the plaintiff, its agents, officers, servants, and employees at the time of the sale of the merchandise sued for.

The Federal Chemical Company demurred to the first paragraph of the answer and entered a motion to strike from the second so much thereof as stated the bureau "was a mutual organization of farmers with no capital stock." Thereafter, the directors amended their answer. Its first paragraph is in the same form of denial contained in the first paragraph of the original. The second contained a copy of the articles of incorporation of the bureau, and alleged: "That by virtue of the foregoing articles of incorporation of the Boone County Farm Bureau, the corporation is, and at all times since its incorporation, has been a corporation under section 879, Kentucky Statutes, and is, and has been, a corporation since no pecuniary profits were to be derived by any of its incorporators or members *** and by virtue of section 883, Kentucky Statutes, the defendants, nor any of them, are liable for any part of the debt sued on herein." The third reiterates substantially the allegations contained in the second paragraph of the original. The fourth restates the allegation that the bureau was indebted in excess of $10,000 at the time of, and before, the purchase of the fertilizer mentioned in the petition and which was known to the fertilizer company, its officers, agents, servants, and employees at the time of the sales of the fertilizer. It demurred to the second and third paragraph of the amended answer, and entered a motion to strike therefrom so much of the second as pertained to sections 879 and 883, Kentucky Statutes.

The court overruled the demurrer to each paragraph of the original and amended answer and the motions to strike therefrom. The Federal Chemical Company reserved an exception.

The record does not show that either the original or amended answer was responded to. However, the court, the parties, and their counsel treated the same as controverted by trying the issues as if made by a proper pleading. It is our duty now so to consider the case.

The jury's verdict was in favor of the directors and the assignee of the corporation.

The Federal Chemical Company is here insisting that its demurrer to each paragraph of the answer as amended should have been sustained. The directors and the assignee argue that its petition does not state facts sufficient to constitute a cause of action, in that it fails to allege that the Federal Chemical Company, at the time it sold and delivered the fertilizer to the bureau, had no knowledge or information that the corporation had exceeded the limitation of its right to incur an indebtedness in excess of $10,000.

We will first consider and dispose of the directors' and assignee's demurrer to the petition.

If, in fact, the Federal Chemical Company, or any one acting for it, had knowledge or information that the Boone County Farm Bureau had exceeded its charter limit of indebtedness, this was a defense. The duty to allege and prove it was on the directors and the assignee. This precise question was presented and determined adversely to the directors and the assignee in the present case, in Nuckels v. RobinsonPettett Co., 159 Ky. 214, 166 S.W. 972. See Ph nix Third National Bank v. Martin, 219 Ky. 579, 293 S.W. 1064.

The rule in such case is, where one is relying on a statute for the right of recovery, the burden is upon him to allege and prove that his cause of action does not come within any exception set forth in the statute. The statute (section 550, Ky.St.) under which the Federal Chemical Company seeks to recover of the directors does not contain any exception. Therefore, if the directors could show that the Federal Chemical Company or its salesman had knowledge or information that the bureau had exceeded its debt limit at the time the fertilizer was sold or delivered, such was a good defense, as it would thus appear that the fertilizer company was a party to the wrong and had itself been guilty of violating the statute under which it seeks a recovery.

It is distinctly alleged in the petition, and established by the evidence, that the Boone County Farm Bureau attempted to incorporate under the law of this commonwealth, and as a corporation actually engaged for...