Hill v. Pioneer Lumber Co.

• Citation: 18 S.E. 107,113 N.C. 173
• Parties: HILL et al. v. PIONEER LUMBER CO. et al.
• Decision Date: 31 October 1893
• Court: United States State Supreme Court of North Carolina

18 S.E. 107

113 N.C. 173

HILL et al. v. PIONEER LUMBER CO. et al.

Supreme Court of North Carolina

October 31, 1893

Appeal from superior court, Wayne county; Brown, Judge.

Action by I. F. Hill and others against the Pioneer Lumber Company G. A. Griswold, and others, to set aside for fraud a judgment confessed by defendant company in favor of defendant Griswold. Defendants demur. Judgment for plaintiffs. Defendants appeal. Affirmed.

Directors and managers of an insolvent corporation are precluded because of the fiduciary position they occupy, from securing by their official action any preference over other creditors.

Busbee & Busbee, for appellants.

Aycock & Daniels, for appellees.

MacRAE J.

This case is presented to us as upon a demurrer, all the facts alleged in the complaint being admitted in the answer, and the conclusion of law contended for by the plaintiff being denied, thus raising the issue of law whether the facts stated in the complaint constitute a cause of action. It is admitted in the pleadings that, at the time of the confession of judgment in favor of G. A. Griswold against the Pioneer Lumber Co., the defendant corporation was insolvent; that said Griswold and one Hall were the only stockholders, and constituted the board of directors; that said Hall was president, and said Griswold was secretary and treasurer, of said corporation; and that Griswold was present at and participated in the meeting at which resolutions were adopted directing Hall, as president, to confess judgment against the company in favor of Griswold. On this state of facts, the plaintiff I. S. Hill contends that the directors became trustees of the corporate property for the benefit of the creditors, and could not take advantage of their knowledge and position to gain an advantage over the other creditors. We advert to the fact that there appear to be but two members of the defendant corporation. But for the admission in the answer, we might inquire whether there has been such an incorporation as is permitted by section 677 of the Code, as this privilege is extended to any number of persons not less than three. However, as the answer admits that the said defendant is a corporation duly created by the laws of North Carolina, we will proceed at once to the consideration of the only question presented,--whether an insolvent corporation may confess judgment under the statute to a director in the same, who is also a creditor.

There may have been a discussion at an earlier day as to the precise re at on in which a director stands to the corporation of which he is an officer,--whether an actual or a quasi trustee for the shareholders, and, in case of the insolvency of the corporation, for the creditors, also. But there can be no doubt that he occupies a fiduciary relation to the company, which, by virtue of his office, he represents in the management of its principal functions; neither can there be any doubt that the capital stock and property of the corporation, in case of its insolvency, constitute a fund first, for the satisfaction of its creditors, and next for the shareholders. As is said by Mr. Justice Miller in Sawyer v. Hoag, 17 Wall. 610: "Though it be a doctrine of modern date, we think it now well established that the capital stock of a corporation, especially its unpaid subscriptions, is a trust fund for the benefit of the general creditors of the corporation; and when we consider the rapid development of corporations as instrumentalities of the commercial and business world in the last few years, with the corresponding necessity of adapting legal principles to the new and varying exigencies of this business, it is no solid objection to such a principle that it is modern, for the occasion for it could not sooner have arisen." As it is stated in 2 Story, Eq. Jur. § 1252: "Perhaps to this same head of implied trusts upon presumed intention (although it might equally well be deemed to fall under the head of constructive trusts by operation of law) we may refer that class of cases where the stock and other property of private corporations is deemed a trust fund for the payment of the debt of a corporation, so that the creditors have a lien or right of priority of payment on it, in preference to any of the stockholders in the corporation." This doctrine was clearly stated by Mr. Justice Story in Wood v. Dummer, 3 Mason, 311, in 1824, and has been generally followed and announced in the treatises on this branch of the law ever since that time. 2 Mor. Priv. Corp. § 780; 1 Beach, Priv Corp. § 116. And we are not without authority in our own court for the same principle, as very clearly stated in an interesting and able opinion of the late Mr. Justice Davis in Foundry Co. v. Killian, 99 N.C. 501, 6 S.E. Rep. 680. This much being established, we may find the duty and liability of the director laid down in the very many, and sometimes diverse, decisions in the leading courts of this country. As he is selected and intrusted with the management of the affairs of the corporation, and has charge of its property and business, it applies to him that, "whenever confidence is reposed, and one party has it in his power, in a secret manner, for his own advantage, to sacrifice those interests which he is bound to protect, he will not be permitted to hold any such advantage." 1 Story, Eq. Jur. § 323. As a sequence to the foregoing propositions, we find: "An insolvent corporation being indebted to its officers and directors, they executed the notes of the corporation in their own favor, and, having obtained judgment by default, issued execution thereon. In the distribution of the proceeds of the sheriff's sale of the personal property of the corporation, held, that this conduct of the officers was a fraud in law, which gave them no preference over general creditors in the distribution." Hopkin's Appeal, 90 Pa. St. 69, cited as an illustration under the head of "Liability of Directors for Fraud," 1 Lawson, Rights, Rem. & Pr. § 343. In 17 Amer. & Eng. Enc. Law, at page 122, where very many cases pro and con are cited, this principle is evolved from the weight of authorities: "It may be stated as a general rule that directors of an insolvent corporation cannot, as creditors of such...