Garrett v. Burlington Plow Co.

• Decision Date: 06 October 1886
• Citation: 29 N.W. 395,70 Iowa 697
• Parties: GARRETT v. BURLINGTON PLOW CO. AND OTHERS.
• Court: Iowa Supreme Court

70 Iowa 697

29 N.W. 395

GARRETT

v.BURLINGTON PLOW CO. AND OTHERS.

Supreme Court of Iowa.

October 6, 1886.

Appeal from Des Moines district court.

Action in chancery to foreclose a mortgage executed by the Burlington Plow Company to plaintiff, as a trustee for certain of its creditors, upon real estate and personal property. There was a decree granting the relief prayed for in plaintiff's petition. Defendants appeal.P. H. Smyth & Son, Poor & Baldwin, S. L. Glasgow, and J. T. Illick, for appellants.

J. C. Power and Newman & Blake, for appellee.

BECK, J.

1. The questions presented in this case arise upon the ruling of the district court in sustaining a demurrer to the answers of defendants to plaintiff's petition. It therefore becomes necessary to state with particularity the pleadings in the case, especially the answers held upon the demurrer to present insufficient defenses to the action.

The petition alleges the corporate character of defendant the Burlington Plow Company, and that, being indebted by promissory notes to the Iowa State Savings Bank in the amount of $10,000, to Rubie D. Tuttle and Lauren Tuttle in sums of $7,295.93 and $6,641.81, respectively, it executed to plaintiff, as trustee, a mortgage upon real and personal property, to secure its indebtedness to these several parties. The petition prays for judgment upon the several promissory notes, and the foreclosure of the mortgage. The petition alleges that after the plow company executed the mortgage to plaintiff it made an assignment of its property, for the benefit of its creditors, to Christian Mathes, who is made a defendant to the action.

In an answer and amended answers he pleads the following matters as defenses:

The plow company is indebted to various creditors other than the persons for whom plaintiff is trustee in the sum of $21,400. Its capital stock, authorized by the articles of incorporation, is $50,000, of which $25,000 was subscribed. Its indebtedness was limited by its articles of incorporation to two-thirds of the amount of its capital stock. At the time of the assignment its indebtedness exceeded $50,000. No provision is made in the mortgage for the application of the proceeds of the sale by the mortgagor of personal property covered thereby to the payment of the debts secured; manufactured articles and material therefor being covered by the mortgage, of which the company was to retain possession. The promissory note to the savings bank was indorsed by E. D. Rand, one of the incorporators and a director of the company, who is solvent. Rubie D. Tuttle, to whom another note is payable, is one of the incorporators, and the wife of another incorporator, S. S. Tuttle, who is secretary of the company. The other note was executed to the administrator of Lauren Tuttle, another incorporator, and father of S. S. Tuttle. Rand and S. S. Tuttle have been directors of the company since its organization, and Lauren Tuttle was a director up to the time of his death.

The directors, with knowledge of the existence of corporate debts beyond the limit prescribed by the articles of incorporation, and the insolvency of the company, and knowing that the other creditors who had given it credit in ignorance of these things were pressing their claims, caused the mortgage in suit to be executed in order to indemnify themselves. On the day after the execution of the mortgage they transferred to the National State Bank of Burlington notes and accounts to the amount of $40,000, the proceeds of which were to be applied, first, in payment of the sum of $18,000 owed by the company to that bank, and the balance to be applied in payment of the indebtedness secured by the mortgage in suit. The claims thus transferred, and the property covered by the mortgage, constituted substantially all the property of the plow company. After the death of Lauren Tuttle no person was chosen to fill his place in the board of directors of the corporation.

The creditors whose claims were not secured reposed great confidence in the business character and integrity of the directors, especially of Rand, who is a man of great wealth. These directors conceded the amount of the indebtedness of the company, and the other creditors, having no knowledge on the subject, believed it was solvent, and therefore gave it credit. Two of the directorsof the company are the heirs of Lauren Tuttle, deceased, and the consideration of the debt to Rubie D. Tuttle was the property of her husband, one of the directors. She and the administrator of the estate of Lauren Tuttle had notice when the notes were executed that the indebtedness of the incorporation exceeded the limit prescribed by its articles of incorporation. The money was obtained upon the note to the Iowa Savings Bank, upon the credit of the directors, who indorsed it, or guarantied its payment.

Other matters are alleged in the answers of like import as the foregoing, tending to show that the directors acted in the execution of the mortgage for their own protection, which need not be here more specifically noticed. It is finally charged that the execution of the mortgage, and the transfer of the notes to the national bank, being a disposition of all the property of the plow company, amounts, in effect, to a general assignment of its property, with preferences to certain of the creditors, and is therefore invalid.

Plaintiff, by demurrer, assailed the answers of defendants on the ground that no defense to the action is pleaded therein.

2. It will be observed that it is not alleged in defendant's answers that either of the notes secured by the mortgage was not executed in good faith, for the full consideration shown upon its face; nor is it alleged that any fraud was practiced by either of the payees in procuring the notes. The mortgage is assailed on the grounds that the payees of two of the notes were stockholders and directors in the plow company, or held such relations to the directors that their rights were no other than the rights held by the directors.

The transaction, so far as it involves the indebtedness to the Iowa State Savings Bank, is questioned upon the ground that the...