Heineman v. Marshall

• Decision Date: 12 December 1905
• Citation: 92 S.W. 1131,117 Mo. App. 546
• Parties: HEINEMAN v. MARSHALL et al.
• Court: Missouri Court of Appeals

92 S.W. 1131

117 Mo. App. 546

HEINEMAN v. MARSHALL et al.

St. Louis Court of Appeals. Missouri.

December 12, 1905.

Rehearing Denied February 27, 1906.

1. CORPORATIONS — OFFICERS — BREACH OF TRUST—LIABILITY FOR PROCEEDS.

The act of the officers of a beneficial association in surrendering control of the association and transferring their offices to others for a money consideration was a breach of trust,

which rendered them liable to account to the association for the money which they received.

2. SAME—RIGHTS OF SUBSEQUENT CREDITOR.

Where officers of a beneficial association, in violation of their trust, transferred control of the association and surrendered their offices to others for a money consideration, a subsequent creditor of the association was not entitled to recover from the delinquent officers the proceeds of the illegal transaction.

Nortoni, J., dissenting.

Appeal from St. Louis Circuit Court; Moses N. Sale, Judge.

Action by Carrie Heineman against Albert H. Marshall and others. From a judgment for plaintiff, defendants appeal. Reversed.

Edwin S. Puller and Barclay & Fauntleroy, for appellants. Boogher, Pearce & Davis, for respondent.

GOODE, J.

Plaintiff is a judgment creditor of the Supreme Council, Knights of Equity of the World, an incorporated society organized, according to the avowal of its charter, to disseminate good principles, alleviate suffering and furnish fraternal insurance. Its active existence ceased in 1903, and since then it has had no meetings and done no business. Judgment was rendered against it in plaintiff's favor on December 21, 1903, for over $1,200, including the costs of the action. There was a payment on the judgment of $123, but the balance still remains unpaid. An execution was issued for this balance and returned nulla bona, February 1, 1904, thus proving that the association is insolvent. After the return was made, the plaintiff instituted this action to enforce payment of her judgment out of assets of the association alleged to be in the hands of the defendants, who were in 1899, trustees of the association and its principal officers. At that time, the defendant Marshall held the chief office of supreme commander, and the defendant Cunningham the second office of supreme vice commander. The two defendants dominated the board of trustees and, according to their own admissions, completely controlled the affairs of the society. On May 23, 1899, pursuant to an arrangement entered into previously, and for a pecuniary consideration received and retained by them, they turned over the control of the order to L. Dow Moore and his associates. That result was accomplished in this manner: The members of the board of trustees, at the instigation of the defendants, resigned in succession, and as soon as a vacancy was created by the resignation of one member, it was filled by the remaining members electing some person selected by Moore in his stead. This course was followed until Moore and his associates had been given all the places on the board. Thereupon Marshall and Cunningham resigned their executive offices and Moore was chosen supreme commander and some dummy of his supreme vice commander. The association had practically no assets at the time and was more than $1,000 in debt. Moore's purpose was to use the business of the order for his own benefit, and the purpose of the defendants was to make a profit by selling the control to Moore. They obtained $1,600 or more of notes and real property in the transaction. Marshall was the active party in the negotiation with Moore leading to the sale, and in testifying both he and Cunningham, who is his father-in-law and solvent, as he is not, endeavored to exonerate Cunningham from complicity in the affair, but in our opinion failed to do so. However, it is not necessary to recite the facts which implicate Cunningham, because we hold that the plaintiff has no standing in court to compel either defendant to account for the proceeds of the transaction.

The grounds on which plaintiff founds her claim to do so are that the profit the defendants procured by selling their offices and the control of the association accrued to them as trustees; consequently belongs of right to their cestui que trust, the association, and will be treated by a court of equity as an asset of it, which she may reach by this proceeding in the nature of an equitable garnishment, and have applied to satisfy her judgment. The general theory on which the plaintiff proceeds is sound, but not applicable to her case; because, so far as is shown, her debt arose four years after the fraud of which she complains. She is a subsequent creditor. Stress is laid in the briefs on several questions to which we will not attend; for we consider the fact just mentioned an insuperable obstacle to the relief invoked. As all emolments received by trustees in dealing with the subject-matter of their trust, inure in equity to the benefit of the trust estate, the property delivered to defendants by Moore for transferring their offices to him, belonged to the association. They were free to resign their offices, no doubt; but in doing so for pay, and pursuant to an agreement that they would use their influence with obsequious trustees to have a new set of corporate officials installed, a flagrant breach of trust was committed, and they stood liable to account for the proceeds, either to the order itself, a receiver of it, or any other party having the right to sue. Bent v. Priest, 10 Mo. App. 543; Id., 86 Mo. 475; McClure v. Law, 161 N. Y. 78, 55 N. E. 388, 76 Am. St. Rep. 262; Gaskell v. Chambers, 26 Beav. 360.

Whether a creditor whose demand arose prior to the commission of the fraud might call on the defendants to account for what they received as an asset of an insolvent company which the creditor was entitled to have applied on his debt, is a question we need not examine. Prior creditors may annul transfers of property made by their debtors without consideration, or with a general fraudulent purpose; whereas subsequent creditors can do so only when the transfer was executed with a view to incurring the subsequent debts and evading payment. Kinealy v. Macklin, 89 Mo. 433, 14 S. W. 507; Snyder v. Free, 114 Mo. 360, 21 S. W. 847; Krueger v. Vorhauer, 164 Mo. 156, 63 S. W. 1098. This rule of law governs in transactions wherein the debtor acted fraudulently. A different doctrine prevails where a third person obtains by fraud, property belonging to a debtor who is innocent; and, in such instances, creditors, though the loss of the property lessened the estate to which they must look for payment, cannot recover the property. The right to recover it belongs exclusively to the debtor himself, or some one who has succeeded to his right. Parker v. Roberts, 116 Mo. 662, 22 S. W. 914. In recognition of this rule, a plaintiff who sought to enforce a judgment against property in the hands of a trustee of a corporation, and alleged to have been received under circumstances which made it a corporate asset, was denied relief. Ready v. Smith, 170 Mo. 163, 175, 70 S. W. 484. The facts of that case were quite similar to those before us.

Cases may arise in which the enforcement of this rule against a prior creditor of an insolvent company would be unfair; instances wherein it appeared that the company itself could not sue to redress the fraud because it was prevented by recreant officials. The present case is such a one, as was also the precedent in which the Supreme Court of the United States refused to redress, at the suit of a subsequent creditor of a corporation, a fraud perpetrated by its directors. The new management composed of Moore and his satellites would do nothing, of course, to recover for the association what they themselves had paid to the defendants in fraud of the association; and if creditors are denied standing in court, in such a predicament, they would have to ask the appointment of a receiver who could sue. But this would needlessly raise an impediment to the collection of their demands; and, in the case of prior creditors, who enjoy an undeniable right to reach all the assets of the company for the satisfaction of their debts, an exception might be made when corporate officers participated in or connived at the fraud. Procuring a receiver is, as we shall see, the remedy to which a subsequent creditor must resort.

The question regarding the right of a creditor of a corporation to sue a party for the recovery of corporate property fraudulently obtained by said party is altogether distinct from the question of the creditor's right to sue without first demanding of the company officials that they take action in the name of the company. As to the latter point, which is dwelt on in the briefs of counsel, we will say nothing; for it is not essential to our decision. Nor are we bound to ascertain whether the rule that creditors cannot expose a fraud practiced on their debtors is applicable to the present cause. The decisive fact is that the plaintiff's debt accrued after the occurrence of the breach of trust which constitutes the basis of her proceeding against the defendants. We have been cited to adjudications which merely enforced the firmly established remedy of equitable garnishment, and to others wherein corporate directors and trustees were made to account to their company or to a shareholder, receiver, or assignee thereof, for profits made by means of their fiduciary positions; but we have been cited to no precedent, nor have we found one, wherein a director or trustee was compelled to account at the suit of a subsequent creditor. Precedents of high authority are to be found denying the relief to that class of complainants, and they are in accord with the general rules of equity governing the rights of subsequent creditors. The most apposite discussion of this subject is Graham v. Railroad Co., 102 U. S. 148, 26 L. Ed. 106, a case which furnishes the rule of decision...