Hoyt v. Hampe

• Decision Date: 15 December 1925
• Docket Number: 36743
• Citation: 214 N.W. 718,206 Iowa 206
• Parties: E. H. HOYT, Receiver, Appellee, v. N. HAMPE et al., Appellants
• Court: Iowa Supreme Court

214 N.W. 718

206 Iowa 206

E. H. HOYT, Receiver, Appellee, v. N. HAMPE et al., Appellants

No. 36743

Supreme Court of Iowa, Des Moines

December 15, 1925

OPINION ON REHEARING JULY 1, 1927.

Appeal from Lyon District Court.--C. C. BRADLEY, Judge.

SUPPLEMENTAL OPINION JUNE 26, 1928.

Suit by receiver of an insurance company against the directors, to recover funds of the company applied by defendants on the price of their stock on a contract for the sale thereof to the Gardner Mortgage & Securities Company. Decree for plaintiff. Defendants appeal.

Affirmed.

J. M Parsons, E. C. Roach, Wagner, Pike & Knoepfler, and Warren H White, for appellants.

Parrish, Cohen, Guthrie & Watters and Thomas & Myers, for appellee.

MORLING, J. EVANS, C. J., and STEVENS, DE GRAFF, ALBERT, and KINDIG, JJ., concur.

OPINION

MORLING, J.

The defendants were the board of directors of the Interstate Automobile Insurance Company, of Rock Rapids, Iowa, of which the plaintiff was appointed receiver in November, 1921. On February 28, 1921, the defendants agreed to sell to the Gardner Mortgage & Securities Company of Bloomington, Illinois, their 1,325 shares of stock, at $ 300 per share, totaling $ 397,500, of which the Gardner Company paid $ 50,000. This $ 50,000 payment is not in controversy. The balance, of $ 347,500, was paid by two checks, drawn on the bank accounts of the Interstate Company,--one for $ 250,000, on the Iowa Savings Bank of Rock Rapids, and one for $ 97,500, on the Des Moines National Bank. The present suit is brought to recover the amount of these two checks. The defendant's claim is: First, that they sustained no trust relationship to the creditors of the company, and also that it is not shown that there were such creditors at the time the checks were drawn, or creditors who would have any right to complain. Second, that the deposit of the Interstate Company with the Iowa Savings Bank was uncollectible, and could not be utilized by the company; that the Gardner Company, in connection with the purchase of stock, agreed to contribute $ 100,000 to the company's surplus, and put in the assets securities which could be utilized; that defendants relied in good faith upon the Gardner Company's agreement, and are not responsible for the failure of the Gardner Company to carry it out.

Two or three principles of law should be borne in mind in the consideration of the facts of the case. The stockholders of a corporation are not entitled to a distribution of the assets among themselves while corporate debts remain unpaid. The creditors must be paid before the stockholders are entitled to corporate property, and the latter are entitled only to what remains after the debts are paid. The creditors have (except as against bonafide purchasers) an equitable right in the assets, in the nature of an equitable lien. Luedecke v. Des Moines Cabinet Co., 140 Iowa 223, 118 N.W. 456; Farnsworth v. Muscatine P. & P. I. Co., 177 Iowa 21, 24, 158 N.W. 741, et seq.; Northern Pac. R. Co. v. Boyd, 228 U.S. 482 (57 L.Ed. 931, 33 S.Ct. 554); Central Imp. Co. v. Cambria Steel Co., 127 C.C.A. 184 (210 F. 696, 706). A distribution of assets among the stockholders while there are unpaid creditors who would be prejudiced thereby is, in law, as to such creditors, fraudulent. Idem. The directors are primarily trustees for the corporation and its stockholders, and it is their duty to manage the affairs of the corporation and administer its assets in accordance with the law and the legal rights of all persons interested. Manifestly, in such management and administration, the board of directors owe to the creditors the duty of not making a disposition of corporate assets which would, as to the creditors, be fraudulent, or which would naturally result in unlawfully prejudicing their rights. The directors have the custody and control of the assets of the corporation for the benefit of those to whom they belong, and necessarily, in the respects indicated, sustain a trust relationship to the creditors. Hibernia Bank & Tr. Co. v. Succession of Cancienne, 140 La. 969 (74 So. 267); Wilkinson v. Bauerle, 41 N.J.Eq. 635 (7 A. 514). If the corporation is insolvent, the directors are trustees for the creditors, as well as the stockholders. Idem; Johnson v. United Railways Co., 281 Mo. 90 (219 S.W. 38); Beach v. Williamson, 78 Fla. 611 (83 So. 860, 9 A.L.R. 1438); 5 Thompson on Corporations (2d Ed.), Sections 6171, 6173, 6175; 1922 Cumulative Supplement, Idem; Mica Prod. Co. v. Heath, 81 N.H. 470 (128 A. 805); Pender v. Speight, 159 N.C. 612 (75 S.E. 851); 14a Corpus Juris 169; Wabash R. Co. v. Iowa & S.W. R. Co., 200 Iowa 384, 202 N.W. 595; First Nat. Bank v. Fireproof Storage Bldg. Co., 199 Iowa 1285, 202 N.W. 14. A fiduciary may not, directly or indirectly, appropriate the trust fund to himself, without the concurrence of the cestuis, with full knowledge of the facts. Idem; 3 Pomeroy's Equity Jurisprudence, Section 1073. Such an appropriation would be voidable at the option of the cestuis, without any showing of fraud, negligence, or prejudice. Idem. Certain classes of contracts made by interested directors have been sustained, on a showing of fairness and good faith (on which the directors have the burden of proof); but those cases are not applicable to the facts of this case. See 2 Thompson on Corporations (2d Ed.), Sections 1225, 1226, 1227, 1232; 14a Corpus Juris 125 et seq.; Section 1621, Code of 1897. When a corporation has become insolvent, and a receiver appointed, the receiver represents the creditors, and has the right of disaffirmance. 14a Corpus Juris 1002, 1003.

The insurance company was required not only to pay losses occurring on policies in force, but also, for the purpose of protecting policyholders, to maintain its capital, and to hold a reserve for unearned premiums. Acts of the Thirty-seventh General Assembly, Chapter 429; Acts of the Thirty-ninth General Assembly, Chapter 190; Code of 1897, Section 1731. Policyholders, in paying their premiums and taking out policies, gave credit to the company, and from the dates of their policies had the right to require the fulfillment of these obligations, and were creditors. 2 Words & Phrases 1713 et seq. See, also, Burnham & Van Shaick v. N.W. Ins. Co., 36 Iowa 632; Shloss v. Metropolitan Sur. Co., 149 Iowa 382, 128 N.W. 384.

The Interstate Company was organized as a stock company in 1918. Its capital stock, at par value of $ 100 per share, was $ 200,000. The record does not show the amount of insurance carried, but the gross premiums, according to the examiner's report, as shown in the ledger assets December 31, 1919 (we assume for the year), were nearly $ 1,000,000, and gross losses $ 311,373.05. It is shown that claims made against the company during the first six months of 1920 amounted to $ 15,000 to $ 18,000 per month. In November and December of 1920 and the first two months of 1921, they increased to $ 45,000 or $ 50,000 per month. During 1920, the defendants contributed to the surplus of the company $ 135,000. This money was borrowed by defendants, and, as will be noted, the funds realized from the checks in controversy were used, in large part at least, to pay defendants' notes (and those of their wives) therefor. In the latter part of 1920, the defendants took under consideration the matter of increasing the capital of the company, and later, the question of procuring reinsurance, and also consolidation. In the course of their efforts to procure reinsurance, they met H. P. Gardner, of Bloomington, Illinois, who was extensively engaged in insurance operations, and authorized him to effect reinsurance. The defendants had looked up the financial condition of Gardner and his company. Gardner showed them his residence, worth $ 30,000 or $ 40,000, and the residences of his associates, worth more; he showed them his office, in which 30 or 40 people were employed. Defendants were informed that Gardner had an extensive insurance business. On October 30, 1920, a bank at Bloomington wrote defendants that Gardner "recently went in for sale of bonds as side line and now endeavoring to promote Gardner Mortgage & Securities Company (or similar name) with capital as much over million as possible to raise. Promotion slow at present. Object when promoted to make and resell mortgages, loans * * * They deal some in city real estate and buy and sell as well as building on their own capital. Reputation good."

Defendants were informed by another bank that Gardner was considered honorable, upright, prompt in every way.

"We give him quite a good line when in funds, business is very good. Probably does the largest insurance business in the city. Responsibility probably $ 20,000."

Another bank informed defendants that they considered Gardner very highly, one of the most successful insurance men in that part; that he had made good. Gardner agreed to arrange for reinsurance. He told defendants that he could better arrange for it by having stock. On January 15, 1921, an agreement was made by the defendants with the Gardner Loan & Trust Company, to sell to the Gardner Company 1,000 shares of the insurance company stock at $ 280 per share, payable $ 50,000 in cash on or before January 25, 1921, $ 50,000 on or before February 10th, and $ 180,000 in approved bonds or securities on or before February 10, 1921. Gardner made none of these payments. Before February 28th, defendants reached the conclusion that further dealings with Gardner were useless. They so notified Gardner, but agreed to give him a further hearing. Tonne, the secretary of the Interstate Company, testifies:

"The negotiations going on between the board and Mr. Gardner at first were mostly explanations or reasons for the delay in reinsurance. The majority of the board...