Harle-Haas Drug Company v. Rogers Drug Company

• Citation: 113 P. 791,19 Wyo. 35
• Decision Date: 07 March 1911
• Docket Number: 627
• Parties: HARLE-HAAS DRUG COMPANY v. ROGERS DRUG COMPANY ET AL
• Court: Wyoming Supreme Court

113 P. 791

19 Wyo. 35

HARLE-HAAS DRUG COMPANY v. ROGERS DRUG COMPANY ET AL

No. 627

Supreme Court of Wyoming

March 7, 1911

ERROR to the District Court, Natrona County, HON. CHARLES E CARPENTER, Judge.

The material facts are stated in the opinion.

Affirmed.

John B Barnes, Jr., and J. R. Sullivan, (M. C. Brown of counsel) for plaintiff in error.

It was error for the court to admit, over objection, testimony tending to show that Tobin, the mortgagee and intervener, was not a stockholder and director of the defendant company. Two shares of stock were issued to him and he testified that he was told that he would be given two shares of stock. For him to deny that he was a member and director of the corporation would be and ought to be considered as an admission of his intent to launch the corporation by evading the law. He dealt with the company as a corporation and is now prevented from questioning its legal existence. And yet if he was neither a stockholder nor director, the company would not have had a legal existence, for it required him as a stockholder and director to complete the number of incorporators and directors required by law. He signed the articles of incorporation and is therefore precluded from denying that he subscribed for and received stock in the company or that he was an officer thereof at the time of its incorporation. If he was a stockholder and director at the time the company was incorporated and for the first year thereafter, he necessarily remained so, since the company had only two other members.

The court erred in finding generally for Tobin and in giving his mortgage preference over the claims of the plaintiffs and the other creditors. As he was a director of the company, the latter could not legally prefer him. A few courts have applied the doctrine that an insolvent corporation may prefer creditors without distinction, but the great weight of authority is against such rule. The majority of the courts hold that directors of an insolvent corporation have no power to prefer themselves. (5 Thompson on Corporations, 2nd Ed 1018, 1019, 1021; Hays v. Bank (Kan.), 33 P. 318; Adams v. Printing Co., 27 Ill.App. 313; Shields v. Hobart, 172 Mo. 491; Stratton v. Allen, 16 N. J. Eq., 229; 198 Pa. St., 446; 75 F. 554; 53 Neb. 670; 36 Neb. 548; 42 Neb. 740; 45 Neb. 549; 175 Ill. 89; 130 Ill 162; 78 Miss. 179; 74 Miss. 290; 136 U.S. 237.) It is true that many cases hold that an insolvent corporation may give its directors preference over other creditors, although few of such cases harmonize with each other. Some base their opinion upon the condition that the preference be to secure or satisfy a pre-existing debt. Some allow a preference if it is not to secure a pre-existing debt. Some hold the preference valid where the director loaned his credit to the company or advanced money to it to prevent others from forcing it into the hands of a receiver. Some uphold the preference if made after the company was known to be insolvent, so that diligent creditors had equal opportunity with the directors to protect themselves. But all of the courts agree that the preference must have been made in good faith. (Oil Co. v. Marbury (U. S.), 23 L. Ed., 328; Corey v. Wadsworth, 118 Ala. 488; Thomp. on Corp., 2nd Ed., pages 1024-1025; State v. Rubber Co., 149 Mo. 181; Henderson v. Trust Co., 143 Ind. 561; Canning Co. v. Reid, 159 Ind. 614; Bank v. Woolen Mills Co., 163 Ind. 214.)

In this corporation no one put up any money unless it was Tobin, and he had only two shares of the stock and claims that he took no part in the affairs of the company. Before the company was organized he had a mortgage on what later became the goods of the company. When the goods were to be bought he suggested the forming of a company. He did not wish to assume the debt personally and so had the company formed; but by endorsing the notes he took the stock and everything that the company had in the way of assets. He kept himself informed as to the condition of the company, as Rogers testified, as it was his duty to do, and when he learned that the company was failing he secured himself by taking the mortgages. It cannot be doubted that he was the chief agent in the incorporation of the drug company, and that he organized it for the purpose of getting in his possession and under his control everything material in the way of assets to satisfy his own claim in utter disregard of the claims of many bona fide creditors. He has assumed the many conflicting and confusing positions in connection with the company and its business for the purpose of defrauding the creditors. The corporation was a fraudulent undertaking from its inception. As a director Tobin was bound to know its financial condition. (21 Ency. L., 2nd Ed., 896, 34 F. 124; 5 Neb. 527; 54 O. St., 549.) His acceptance of the office is presumed. (21 Ency. L., 845.) And although elected for a specified term, a director holds until he resigns, quits the concern by disposing of his holdings, or his successor is elected. (21 Ency. L., 849, and cases cited; 2 Thomp. on Corp., Sec. 1441.) This director assisted the others of the company in concealing its true financial condition by carrying his claim without security from May, 1906, to January, 1908, thus allowing others to deal with it upon the honest belief that the stock was unencumbered and that the corporation had been organized honestly.

Norton & Hagens, for defendant in error, Stephen Tobin.

The appellate court will not disturb a judgment based on conflicting evidence unless it is wholly unsupported by or clearly contrary to the evidence in the case. This proposition is well settled by many decisions of this court. The mere fact that Tobin was named in the articles of incorporation as a director for the first year and that he appears as a stockholder in the books of the company does not estop him to deny that he was a director afterwards, nor the character of his ownership of the stock so as to make him liable as such. A person who receives stock from a corporation as a gratuity cannot be held an actual stockholder, and the liabilities of an actual stockholder do not attach to him. (Christensen v. Eno, 106 N.Y. 97, 60 Am. Rep., 429.) The law does not presume that one who is named in the certificate of incorporation as a director for the first year is a stockholder, for the obvious reason that there can be no stockholders before the certificate is signed and filed. (Furniture Co. v. Opera Co., 11 Wyo. 128.) Nor is there any presumption of law that a person named as a director for the first year holds over after the expiration of his term so as to make him liable as such. (10 Cyc., 740; Bank v. Faber, 56 N.Y.S. 542.) The law requiring a director to be a stockholder means a real and not a sham stockholder. He must be the actual beneficial owner, not merely the ostensible owner. (10 Cyc, 737, 740.) The strongest interpretation that can be given section 3979, Comp. Stat., is that if directors continue to act after their term of office has expired and before successors are elected, the corporation is not in a position to object. Although it appears that Tobin was elected a director by the two remaining members of the company, it also appears that he was not present at that meeting, that he was not notified of such election, and that he never accepted the office in express terms and never acted in the capacity of a director. He was therefore not a director in fact. (Cameron v. Seaman, 69 N.Y. 396.) It is not contended that the by-laws of the company attempted to reduce the number of the directors, but only to vest the authority in the hands of two directors. Tobin was merely a nominal party in the company. The corporation was not dissolved by the loss of one of its directors, for the remaining directors had the power to fill the vacant position. (10 Cyc. 1277.) It is clear, therefore, that without Tobin as a director or stockholder the company might have had a legal existence.

Though a corporation be insolvent, yet if the directors believe it to be solvent they may lend money to it and take security, and are not bound to know that it is insolvent. (Cook on Corp., p. 2124; Converse v. Sharp, 56 N.E. 69.) It has been repeatedly held by this court that a party cannot complain of error unless it is to his detriment, and that where a ruling is erroneous but it does not appear that prejudice resulted to the complaining party, the error, if any, does not give ground for complaint. (Gregory v. Morris, 1 Wyo., 213; Jenkins v. Cheyenne, 1 Wyo., 281; Fein v. Davis, 2 Wyo., 118; Davis v. Lumber Co., 14 Wyo. 517.)

The plaintiff in error is not in position to attack the Tobin mortgage. The proceedings by which he seeks to set aside the mortgage is in the nature of a suit in equity or a creditor's bill in which a large number of unsecured creditors have attempted to join. It is not pretended that plaintiff had a judgment when suit was commenced, nor at any time since, nor that any of the other creditors, except three or four, had any judgment when they were permitted to intervene, and none of them ever had an execution issued. A creditor's bill must be preceded by a judgment at law and cannot be maintained before an attempt to collect the judgment by the issue of execution. (Jones v. Green, 1 Wall. 320; Alder v. Fenton, 24 How. 407; Day v. Washburn, 24 How. 353; Taylor v. Bowker, 11 U.S. 110; Tube Works Co. v. Ballou, 146 U.S. 517, 523; Bank v. Dwight, 47 N.W. 111; Cates v. Allen, 149 U.S. 451; Scott v. Neely, 140 U.S. 106; Fein v. Fein, 3 Wyo. 164.) The Tobin mortgage was declared by the order of Oct. 8, 1908, to be a first and prior lien and mortgage upon the property of the company. That order has never been set aside, nor does it appear in the record that any...