Folsom v. Smith

• Decision Date: 18 February 1915
• Parties: FOLSOM v. SMITH et al.
• Court: Maine Supreme Court

92 A. 1003

113 Me. 83

FOLSOM

v. SMITH et al.

Supreme Judicial Court of Maine.

Feb. 18, 1915.

Report from Supreme Judicial Court, Somerset County, at Law.

Action by Leroy R. Folsom, receiver, against Clyde H. Smith and others. Case reported. Defendants defaulted, and case remanded for hearing in damages.

Argued before SAVAGE, C. J., and SPEAR, CORNISH, KING, BIRD, and HANSON, JJ.

Fred F. Lawrence, of Skowhegan, for plaintiff.

Merrill & Merrill, of Skowhegan, for defendant Smith. George W. Gower, of Skowhegan, for defendant Greene.

R. V. Brown, of Bingham, for defendant Brown.

Walton & Walton, of Skowhegan, for defendant Hill.

Butler & Butler, of Skowhegan, for estate of J. P. Clark.

SAVAGE, C. J. The plaintiff is the receiver of the Smith Publishing Company, a corporation at one time doing business at Skowhegan. The defendants, Smith, Greene, Hill, and Brown, with one Clark now deceased, were its directors. Clark's executors are made defendant parties. We shall speak of Clark as one of the defendants.

This suit is brought to recover for the fraudulent misappropriation of the assets of the corporation by the defendants for their own benefit, whereby its creditors were deprived of the means of enforcing their claims against the corporation. The case comes up on report.

The salient facts are these: Prior to 1911, the defendants Smith, Greene, Hill, and Clark, were stockholders in, and creditors of, the J. F. Smith Publishing Company. In 1911, they took a mortgage of the property of that corporation, which later during the year they foreclosed. The property of the corporation seems to have been chiefly some printing machinery and paraphernalia, and the subscription lists and good will of a small publication then published by it and issued to subscribers, together with such rights as were incident to the management and operation of the publishing business and a mail-order business connected therewith. After the foreclosure, the four defendants named appear to have carried on the business for a time as individuals. But on December 13, 1911, they organized a new corporation, called the Smith Publishing Company, with $60,000 capital stock, and conveyed to it the property and property rights which they had received from the J. F. Smith Company. Thereafter the Smith Publishing Company carried on the business. In the new corporation Hill was president, Smith was treasurer, and Smith, Greene, Hill, and Clark were the directors, and so continued to the end. Each of the four received $15,000 of the capital stock. Afterwards Hill sold defendant Brown one-sixth of his capital stock. Brown was elected a director, and remained such.

The business did not prosper. And in October, 1912, in accordance with a vote of the directors, the good will, subscription lists, publication rights, advertising contracts, and electrotypes of the corporation were sold to the Pulitzer Company, a New York corporation. The purchase price was $7,500 in cash, and $10,000 in the preferred stock of the Pulitzer Company. The cash was received by Smith, the treasurer. The Pulitzer Company stock was issued, hot to the Smith Publishing Company, but to Smith, Greene, and Clark individually, and is so held by them to this time, except 10 shares which Smith later transferred to Brown. Hill and Brown had before that time ceased to contribute to the growing necessities of the corporation. Previously they had contributed less than the others. And apparently for this reason, by a general understanding, the Pulitzer stock was divided among Smith, Greene, and Clark.

In order to understand what was done with the $7,500 cash, it is necessary to go back a little. While the business was being carried on by Smith, Greene, Hill, and Clark as individuals, and perhaps earlier, a deposit account was opened with the Skowhegan Trust Company, in the name of "C. H. Smith, special." At the time of the formation of the Smith Publishing Company, this account was overdrawn to the amount of $10,415.13. The Smith Publishing Company from that time on used the same account in the same name. They deposited to the credit of the "C. H. Smith, special" account and checked against it; the deposits in the whole being much more than the amount of the overdraft at the beginning. But they checked out more than they deposited, and the overdraft gradually grew until in October, 1912, it was about $23,000. When Smith, the treasurer, received the $7,500 cash from the Pulitzer Company, in October, 1912, he deposited it to the credit of the "C. H. Smith, special" account, thereby reducing the overdraft by so much. At the time of the sale, the Smith Publishing Company was unable to pay its debts in the regular course of business, and was, in the eye of the law, insolvent Morey v. Milliken, 86 Me. 464, 30 Atl. 102.

In his declaration, the plaintiff sets forth two grounds for recovery, one as to the $7,500 received from the Pulitzer Company, and the other as to the Pulitzer stock. With respect to the Pulitzer cash, he alleges that, having been paid to Smith, the treasurer, with the knowledge and approval of the other defendants, it became their duty to use it for the payment of their company's debts, and not to prefer themselves, or any of themselves in so doing; but that, in disregard of their duty, they applied the money wholly to the payment of the overdraft at the Skowhegan Trust Company, on account of Smith, that the Publishing Company was not in any sense the debtor of the trust company, and that the payment was made with the sole intent to relieve Smith from his personal obligation to pay the overdraft, and to relieve the other directors from such duty as might exist on their part to contribute thereto, so as to effect an unlawful preference in favor of the defendants. He alleges, also, that the action of the defendants was a fraud upon the other creditors.

With respect to the Pulitzer stock, he alleges that the defendants knowingly, willfully, and fraudulently caused the certificates of stock to be issued to them as individuals, that they received and have retained them as their individual property, which action was fraudulent as to the creditors of the company.

It will be noticed that action is brought against the defendants, not to recover the money and the stock as the property of the company, but to recover damages which the creditors have suffered by reason of their tortious conduct in misappropriating the money and the stock. It is not alleged that the corporation was defrauded, but that its creditors were. The suit is brought apparently for the benefit of creditors, and not for the benefit of the corporation.

The statute under which the plaintiff was appointed receiver (Public Laws of 1905, c. 85), as amended by Public Laws 1907, c. 137, provides that:

"Such receiver shall have power to institute or defend suits at law or in equity, in his own name as receiver, to demand, collect and receive all property and assets of said corporation, to sell, transfer, or otherwise convert the same into cash, and to conduct and carry on the business of said corporation, as ordered by the court, if it appears for the best interests of all concerned."

No special authority is expressly given a receiver to preserve and enforce the rights of creditors, as separate and distinct from the rights of the corporation.

We are aware that there are authorities which hold that a receiver represents the interests of both debtor and creditors, and is a trustee for all parties. See Beach on Receivers, § 264. But the current of authority favors the proposition that a statutory receiver succeeds only to the rights of the defendant in the receivership suit, and is subject to all the equities that could have been successfully invoked against the latter, unless the statute otherwise provides. Beach on Receivers, § 298. The case of Gilbert v. Finch, 173 N. Y. 455, 66 N. E. 133, 61 L. R. A. 807, 93 Am. St. Rep. 623, chiefly relied upon by the plaintiff as authority for the doctrine that a receiver may maintain an action at law against recreant directors for the benefit of creditors, is not inconsistent with this conclusion. In that case corporate funds were wrongfully diverted by the directors, and the corporation was wronged. We have here to deal with a statutory receivership. The general scope of the receiver's powers are marked out, and, we think, limited, by the statute. Taking the statute as a whole, we think it was the legislative intent that a receiver should succeed to the rights of the corporation, and not specifically to the rights of creditors, except as the enforcement of the corporate may inure to the benefit of creditors. Under this statute, a receiver may sue at law or in equity, whenever the corporation itself might have sued, but not where the interests of the...