Howe, Brown & Co. v. Sanford Fork & Tool Co.

• Court: United States Circuit Court, District of Indiana
• Citation: Howe, Brown & Co. v. Sanford Fork & Tool Co., 44 F. 231 (U.S. Cir. Ct., D. Ind. 1890)
• Decision Date: 09 December 1890
• Parties: HOWE, BROWN & CO. et al. v. SANFORD FORK & TOOL CO. et al.

44 F. 231

HOWE, BROWN & CO. et al. v. SANFORD FORK & TOOL CO. et al.

United States Circuit Court, D. Indiana.

December 9, 1890

McNutt & McNutt, for complainants.

McDonald Butler & Snow and George A. Knight, for defendants.

WOODS J.

The bill shows that the respondents McKean, Nixon, Minshall Kidder, and Mayer are stockholders, and all except Mayer directors of the Sanford Ford & Tool Company, incorporated, and that being liable as indorsers of the paper of that company, overdue and about to become due, to the aggregate amount of $69,000, Mayer being liable jointly with the others, or some of them, upon a part of that paper, the said directors, on the 17th of March, 1890, after first procuring the consent and authority of the stockholders that it should be done, caused the officers of the company to execute a mortgage upon the corporate 'buildings, machinery, and plant,' to indemnify them and Mayer from loss on account of that liability; that the company was at the time deeply insolvent, its debts exceeding its assets by as much as $150,000, and that on the 13th of May it was put into the hands of a receiver by the circuit court of Vigo county. The complainants are shown to be general creditors of the company, with claims which, as allowed by the Vigo circuit court, amount to $11,631.39; and they dispute the validity of the mortgage for the indemnity of the respondents on the ground that the directors of the company had no right to obtain a preference for themselves over other creditors. It is not alleged, nor was it claimed in argument, that the respondents, or any of them, did anything with an actual intent to defraud. The question whether or not an insolvent corporation which had not suspended business could prefer its directors or managing agents, who were its creditors, or liable as indorsers of its paper, was considered upon full argument and citation of authorities pro and con in the case of Lippincott v. Carriage Co., 25 F. 577, 586, and the conclusion was reached that the weight of authority and reason was against the validity of such preferences. The theory upon which that conclusion was based is shown in the following extract from the opinion:

'For while it is generally conceded that a corporation, notwithstanding insolvency, continues possessed (while a going concern) of a general power of management of its affairs, and, like natural persons, may give preferences by way of payment or security to one creditor or class of creditors over others, yet in close analogy to the rule which forbids the giving of preferences by individual debtors, for the purpose of securing, or in such manner as to secure, advantage or benefit to themselves, and in manifest accord with the tendency of judicial opinion, as expressed upon consideration of kindred questions, it has been decided in a number of cases that preferences given by insolvent corporations, in such manner as to be of special benefit to the directors or managing agents, or any of them, will be set aside. Indeed, it has been often said by judges, including those of the federal supreme court, that the property of an insolvent corporation is a trust fund, and the directors trustees for the creditors; and, if this were strictly so, it is manifest that no preferences could be allowed between creditors standing in the same relation to the fund. These statements are, however, true in a qualified sense, and lead logically, if not necessarily, to the conclusion that in such cases, if they give preferences, they must do it unbiased by considerations of personal advantage or gain.'

That...