Hays v. Citizens' Bank

• Decision Date: 10 June 1893
• Citation: 33 P. 318,51 Kan. 535
• Parties: W. W. HAYS et al. v. THE CITIZENS' BANK, of Wichita, Kan., et al
• Court: Kansas Supreme Court

33 P. 318

51 Kan. 535

W. W. HAYS et al. v. THE CITIZENS' BANK, of Wichita, Kan., et al

Supreme Court of Kansas

June 10, 1893

Error from Sedgwick Court of Common Pleas.

REPLEVIN by W. W. Hays, as sheriff, and Sullivan & Steinmetz against The Citizens' Bank, of Wichita, Kan., and another. At the January term, 1889, the defendants had judgment, and plaintiffs come to this court. The facts appear in the opinion.

Judgment reversed and remanded.

Edwin White Moore, for plaintiffs in error:

The power of directors of an insolvent corporation to make preferences among the creditors of the corporation, and to secure their own debts, is wrong, and the courts in sustaining such power have taken an inconsistent and illogical position. See Mor. Corp., § 863; Rouse v National Bank, 46 Ohio St. 493. That the assets of a corporation constitute a trust fund for the payment of its debts, has been formulated and announced in many decisions. Wood v. Dummer, 3 Mason, 300; Sanger v. Upton, 91 U.S. 56; Curran v. The State, 15 How. 312; Upton v. Tribilcock, 91 U.S. 45; 3 Pom. Eq. Jur., § 1252; 2 id., § 1046; Taylor, Priv. Corp., § 759. See, also, Haywood v. Lumber Co., 64 Wis. 639; Olney v. Land Co., 16 R. I. 597; Hopkins's Appeal, 90 Pa. 69; Neal's Appeal, 129 id 64; Bradley v. Converse, 4 Cliff. 375; Adams v. Milling Co., 35 F. 433.

JOHNSTON J. All the Justices concurring.

OPINION

JOHNSTON, J.:

This was an action of replevin, brought to recover the possession of merchandise, by the Citizens' Bank and Richard Merkle against W. W. Hays, as sheriff, and Charles Sullivan and George Steinmetz, as attaching creditors of the Steinhauser-Merkle Supply Company. The supply company was a corporation organized under the laws of Missouri, and had been engaged in business as a wholesale grocer at Wichita, Kan., for several years prior to July, 1888. The company had a capital stock of $ 30,000, of which $ 10,000 was originally held by Richard Merkle, $ 10,000 by Steinhauser, his son-in-law, and R. L. Merkle and H. H. Merkle, his sons, each had $ 5,000 of stock. For some time these four persons constituted the stockholders, and all of them were directors. In November, 1887, Richard Merkle donated and transferred his stock to his sons and son-in-law in equal shares. It appears that the business of the company was unprofitable, and on May 2, 1888, it executed to Richard Merkle a chattel mortgage upon its merchandise for $ 15,000, and about the same time executed another chattel mortgage upon the same property to the Citizens' Bank for $ 21,000, which was made subject and inferior to the one given to Richard Merkle. The amount of these two mortgages was far in excess of the property mortgaged. The mortgagees took possession of the mortgaged property at once, and proceeded to convert it into money, and on July 1, 1888, an attachment action was commenced by the plaintiffs in error, and a portion of the mortgaged goods was levied upon by the sheriff. The mortgagees assumed and alleged that they had a joint lien upon the property, and united in bringing this action for the recovery of possession. The attaching creditors alleged that the mortgages were void, and executed with the intent to defraud creditors. It was further alleged that, at the time of the execution of the mortgage to Richard Merkle, he was a director of the corporation, the remaining directors being his sons and son-in-law, who were indebted to him in a great part for the stock which they owned.

On the trial there was testimony tending to show that the company was insolvent when the mortgages were executed, and some testimony that Richard Merkle was then acting in the capacity of a director in the company. It is true that he had donated his stock six months before the mortgage was made, but there is no evidence that any transfer of the stock was made upon the stock books of the company, and while one witness stated that he supposed that Richard Merkle had resigned his directorship, he based that supposition upon the fact that the stock had been sold. There is testimony that his name appeared upon the stationery and printed matter as a director, and that he continued to participate in the business of the company and direct its management up to the time that the mortgage was made. After this testimony tending to show insolvency, and that Merkle was a director at the time of the execution of the mortgage, the court was asked to give the following instruction:

"If the jury shall find from the evidence that the plaintiff Richard Merkle was a director of the Steinhauser-Merkle Supply Company at the time when the chattel mortgage was executed, and the company was at that time insolvent, the chattel mortgage would only be valid provided the interests of the other creditors were fully and honestly protected in the transaction by the other directors. A director may take a chattel mortgage from the corporation for which he is so acting, to secure a bona fide indebtedness, if such mortgage be taken in good faith, and if such director derives no advantage over other creditors by reason of his office. But a director has no right to use his position to secure an advantage over other creditors. The directors of an insolvent corporation are the trustees of the assets of the corporation for the benefit of all creditors alike, and must exercise their trust in good faith in behalf of all the creditors. If, therefore, the plaintiff Richard Merkle was a director in the aforesaid corporation when this chattel mortgage was given, and used his power as such director to secure the chattel mortgage, or was in substantial degree aided by his position as such director in obtaining a mortgage, the mortgage will be void as against an attaching creditor. In considering the question, you may take into consideration the fact that, of the other three directors, two were the sons and one the son-in-law of the plaintiff Richard Merkle. The fact of the relationship mentioned between the plaintiff and the other directors of the corporation will warrant you in scrutinizing the transaction with especial care."

This instruction was refused, and verdict and judgment were rendered in favor of the mortgagees. The refusal to charge the jury as requested, or that directors of a...