Hoagland v. United States Trust Co.

• Decision Date: 04 May 1932
• Citation: 160 A. 662
• Parties: HOAGLAND et al. v. UNITED STATES TRUST CO. SAME v. CLIFFORD F. MacEVOY CO.
• Court: New Jersey Court of Chancery

160 A. 662

HOAGLAND et al.

v. UNITED STATES TRUST CO.

SAME

v. CLIFFORD F. MacEVOY CO.

Court of Chancery of New Jersey.

May 4, 1932.

Syllabus by the Court.+++

1. The word "insolvent" as used in section 64 of the General Corporation Act (2 Comp. St. 1910, p. 1638, § 64) means the same as "insolvent" as used in section 65 of that act (2 Comp. St. 1910, p. 1640, § 65); that is, a corporation is insolvent when there is a general inability to meet pecuniary liabilities as they mature by means of either available assets or an honest use of credit.

2. The word "meet" as used in this formula does not necessarily mean "pay." Debtors "meet" their pecuniary obligations if extensions and renewals thereof are obtained by an honest use of credit.

3. The mere circumstance that the liabilities of a corporation exceed its assets does not necessarily constitute insolvency within the intent of section 64 (2 Comp. St. 1910, p. 1638, § 64).

4. There are two classes of corporate insolvency: (1) Where the corporation owes more money than its assets can ever be made to pay, which is an absolute insolvency, or insolvency in its popular sense; (2) where the corporation does not possess available resources to meet its present needs, which is a technical insolvency.

5. Not every case of technical insolvency will warrant the appointment of a receiver under section 65 of the Corporation Act (2 Comp. St. 1910, p. 1640, § 65) or invalidate a transfer of corporate assets under section 64 of that act (2 Comp. St. 1910, p. 1638, § 64).

6. Ordinarily, a receiver will not be appointed unless the proof of insolvency is clear and satisfactory and there is no reasonable prospect that the corporation, if let alone, will not be able to carry on with safety to the public and advantage to its stockholders.

7. The same test should be applied in determining the solvency or insolvency of a corporation under section 64 (2 Comp. St. 1910, p. 1638, § 64), and in the light of circumstances as they appeared at the time of the transactions complained of, and not as they appear in view of subsequent events.

Separate suits by Irving P. Hoagland and others, as trustees in bankruptcy of the W. J. MacEvoy Construction Company, a bankrupt, against the United States Trust Company, and against the Clifford F. MacEvoy Company. On final hearing.

Bills of complaint dismissed:

Lum, Tamblyn & Colyer, Ralph Lum, and Samuel Kaufman, all of Newark, for complainants.

Riker & Riker and Andrew Van Blarcom, all of Newark, for defendant United States Trust Co.

Milton M. Unger, of Newark, for defendant Clifford F. MacEvoy Co. BERRY, Vice Chancellor.

The complainants seek to set aside as fraudulent, under section 64 of the General Corporation Act, (2 Comp. St. 1910, p. 1638, § 64), a payment of $20,000 to the United States Trust Company on account of a note of the bankrupt held by that company on April 1, 1930, and a payment of $4,500 to the defendant Clifford P. MacEvoy Company in satisfaction of a note of the bankrupt in that amount held by this defendant on April 4, 1930. The W. J. MacEvoy Construction Company was adjudicated a bankrupt on July 2, 1930; a voluntary petition having been filed on June 11. 1930. Both of the payments involved were made for past indebtedness.

Section 64 of the General Corporation Act provides in part that "whenever any corporation shall become insolvent or shall suspend its ordinary business for want of funds to carry on the same, neither the directors nor any officer or agent of the corporation shall sell, convey, assign or transfer any of its estate, effects, choses in action, goods, chattels, rights or credits, lands or tenements; nor shall they pr either of them make any such sale, conveyance, assignment or transfer in contemplation of insolvency, and every such sale, conveyance, assignment or transfer shall be utterly null and void as against creditors." The sole question here involved is whether or not, on the dates of these two payments, the W. J. MacEvoy Construction Company was insolvent. The question of the payments being "in contemplation of insolvency" may be entirely eliminated, as I find no evidence which would indicate that insolvency was in contemplation either by the bankrupt company itself or the defendants on the dates in question, except in the sense stated by Vice Chancellor Grey in Reed v. Helois Carbide Specialty Co., 64 N. J. Eq. 231, at, page 243. 53 A. 1057. 1062. In that case Vice Chancellor Grey said: "In all business enterprises which are threatened with financial embarrassment. Insolvency is necessarily within contemplation. It is very rarely, indeed, that the financial situation of a corporation is so perfectly defined that it continues solvent up to a given instant, and is immediately thereafter insolvent. In almost all such cases there is a period of struggle, during which efforts are made to rescue the enterprise from threatened insolvency."

But in Regina Music Box Co. v. Otto & Sons, 65 N. J. Eq. 582, at page 586, 56 A. 715, 717. Vice Chancellor Stevens said: "To contemplate insolvency, within the meaning of the act, is to have in mind something more than the mere possibility of insolvency." And, indeed, counsel for complainants in their brief abandon any claim that the two payments in controversy were made in contemplation of insolvency and frankly concede that, unless the fact of insolvency on the dates of the payments is established, the bills must be dismissed.

There is no doubt in my mind but that at, the time these payments were made W. F. MacEvoy, who was the controlling factor in the bankrupt company, had no thought but that he would be able to carry on. There is no evidence whatever from which knowledge of the company's alleged financial embarrassment might be imputed to the defendant trust company. The other defendant was fully aware of the financial condition of the W. F. MacEvoy Construction Company, but that knowledge, in my judgment, justified the belief that the debtor company was entirely solvent. But knowledge of insolvency, either by the officers of the debtor corporation itself or by the creditors who received the contested payment, is, of course, immaterial. The fact of insolvency or insolvency is controlling. But "the more circumstance that the liabilities of a corporation exceed its assets does not necessarily constitute insolvency. A corporation, so circumstanced, which is actively pursuing its regular business with reasonable expectations of business conditions improving may not be deemed insolvent, within the intent of section 64." Turp v. Dickinson, 100 N. J. Eq. 41, at page 45, 134 A. 888, 890.

In Schneider v. Hamilton Trust Co., 105 N. J. Eq. 373, at page 375, 147 A. 863, 864. Vice Chancellor Backes said: "There can be no doubt that the liabilities of the Savoy Company exceeded its assets and that it was in fact insolvent when the exchange was made. Calling the creditors together shortly thereafter indicates that; but that it was at the time insolvent in the statutory sense (i. e., 'a general inability to meet pecuniary liabilities as they matured, by means of either available assets or an honest use of credit') is by no means established. It was functioning normally. It had not actually suspended its ordinary business. Its mill was in full operation, and the exchange was in the regular course of business."

The word "insolvent" as used in section 64 of the General Corporation Act (2 Comp. St. 1910, p. 1638, § 64) must be defined the same as "insolvent" as used in section 65 of that act (2 Comp. St. 1910, p. 1640, § 65); that is, a corporation is Insolvent when there is a general inability to meet pecuniary liabilities as they mature by means of either available assets or an honest use of credit. First National Bank of Lyndhurst v. Bianchi & Smith, Inc., 106 N. J. Eq. 333, 150 A. 774, 775. See. also, Skirm v. Eastern Rubber Manufacturing Co., 57 N. J. Eq. 179, 40 A. 769; Wright v. American Finance & Securities Co., 85 N. J. Eq. 181, at page 183, 96 A. 387; Hoover Steel Ball Co. v. Schafer Ball Bearings Co., 89 N. J. Eq. 433, 105 A. 500.

It is pertinent, therefore, to inquire as to what condition of solvency or insolvency will justify the appointment of a receiver to wind up the affairs of a corporation.

In Atlantic Trust Co. v. Consolidated Electric Storage Co., 49 N. J. Eq. 402, 23 A. 934, 936, which involved an application for a receiver of a corporation on the ground of insolvency, Vice Chancellor Van Fleet said: "The principle which I think should control the court in the exercise of this power is this: never to appoint a receiver unless the proof of insolvency is clear and satisfactory, and unless it also appears that there is no reasonable prospect that the corporation, if let alone, will soon be placed, by the efforts of its managers, in a condition of solvency."

This language was quoted with approval by Chancellor McGill in Fort Wayne Electric Corporation v. Franklin Electric Light Co., 57 N. J. Eq. 7, 41 A. 217, and by Vice Chancellor Stevens in Regina Music Box Co. v. Otto & Sons, supra. In the latter case Vice Chancellor Stevens added: "If this be the true principle where the appointment of a receiver is concerned, certainly a fortiori must it be the true one where the dispute is over the validity of a mortgage taken by a creditor in good faith, in the ordinary course of its business, a considerable period of time before its failure."

As pointed out by Vice Chancellor Learning in Sternberg v. Vineland Trust Co., unreported, but referred to and quoted in Koch v. Morsemere Trust Co., 107 N. J. Eq. 516, 153 A. 498, and Smith v. Washington Casualty Insurance Co., 110 N. J. Eq. 122, at pages 133 and 134, 159 A. 510, 516, there are two classes of insolvency: First, insolvency "in the popular sense of that word, i. e., 'that it owes more money than its assets can ever be made to realize' "; and, second, a technical insolvency in the sense that it does not...