In re Beachy & Co.

• Citation: 170 F. 825
• Court: U.S. District Court — Eastern District of Wisconsin
• Decision Date: 07 June 1909
• Parties: In re BEACHY & CO.

170 F. 825

In re BEACHY & CO.

United States District Court, E.D. Wisconsin.

June 7, 1909

This is a statutory review of an adjudication made by Hon. E.Q. Nye referee in bankruptcy, whereby the claim of Jacob Laskin against the bankrupt corporation was allowed. The objections filed by the trustee to such claim are as follows:

First. That no amount is due or owing from said bankrupt to said Jacob Laskin.

Second. That said Jacob Laskin was guilty of fraud in securing the charter for said corporation, and was guilty of violating the corporation laws of Illinois under which said corporation was formed, and that such fraud and such violations resulted in detriment to the creditors of said estate.

Third. That under section 16, c. 32, of the Laws of the state of Illinois (Hurd's Rev. St. 1908), said Jacob Laskin is liable, personally and individually, to the trustee of said estate in a sum far in excess of his alleged claim, for the reason that he consented to the creation of debts far in excess of the amount of the capital stock.

Fourth. That said Jacob Laskin is indebted to your trustee for the capital stock of said corporation that said Laskin subscribed for, and upon which he had paid but the sum of about $400.

An objection was interposed by sundry creditors, alleging preferential payments to claimant within four months of the filing of the petition. This objection was practically abandoned at the hearing.

The bankrupt is a corporation organized under the laws of the state of Illinois in October, 1906, with a capital stock of $5,000, doing business in selling furs, ladies' suits cloaks, etc., at Green Bay, Wis. The incorporators were Jacob Laskin, of Chicago, J. W. Beachy, and A. L. Wolfson, who subscribed for the total amount of the capital stock. The corporation was adjudicated bankrupt August 31, 1908. Jacob Laskin filed a claim against the estate for $2,091.50 for money loaned, and goods, wares, and merchandise sold and delivered to the bankrupt from time to time. It is conceded that the bankrupt corporation did receive from the claimant the amount of money, goods, wares, and merchandise set forth in the claim, and that the prices charged for such goods were reasonable. So that the first objection was properly overruled by the referee. The real contest arises over the alleged fraudulent conduct of Laskin in connection with the organization of the corporation. This objection is predicated upon three sections of the Illinois statute. Section 16, c 32, Hurd's Rev. St. Ill. 1908, reads as follows:

'If the indebtedness of any stock corporation shall exceed the amount of its capital stock, the directors and officers of such corporation assenting thereto, shall be personally and individually liable for such excess to the creditors of such corporation.'

Section 18 reads as follows:

'If any person or persons, being or pretending to be, an officer or agent, or board of directors, of any stock corporation or pretended stock corporation, shall assume to exercise corporate powers, or use the name of any such corporation, or pretended corporation, without complying with the provisions of this act, before all stock named in the articles of incorporation shall be subscribed in good faith, then they shall be jointly and severally liable for all debts and liabilities made by them, and contracted in the name of such corporation, or pretended corporation.'

Section 21 reads as follows:

'If any certificate, report or statement made, or public notice given, by the officers of any corporation, shall be false in any material representation, all the officers who shall have signed the same, knowing it to be false, shall be jointly and severally liable for all damages arising therefrom.'

After its incorporation the bankrupt corporation engaged in the business, which it was apparently authorized to carry on, until proceedings in bankruptcy supervened.

Burke, Alexander & Burke, for trustee.

Marshutz & Burnham, for claimant.

Bloodgood, Kemper & Bloodgood, for certain creditors.

QUARLES, District Judge (after stating the facts as above).

The bankrupt corporation, having had the money and goods covered by the claim, would, upon the plainest principles be estopped to raise any of the objections based upon malfeasance of the officers of the corporation, and it is difficult to see why the trustee is not affected by the same estoppel. Speaking broadly, the theory of the bankruptcy act of July 1, 1898, c. 541, 30 Stat. 544 (U.S. Comp. St. 1901, p. 3418), is that the trustee steps into the shoes of the bankrupt, subject to the same liens, conditions, and restrictions under which the bankrupt rested. Congress enlarged the jurisdiction of the bankruptcy court to recover property, when the transfer was fraudulent or preferential, by sections 60b, 67e, and 70e. When the trustee accepts a lease, or a contract for a lease made by the bankrupt, he must assume every obligation and be bound by all the conditions that the contract imposes upon the bankrupt. Loveland (3d Ed.) p. 488.

The same rule applies to property purchased by the bankrupt on condition. It passes to the trustee subject to all such conditions and liens. Loveland, p. 491. This rule is familiar, that the title of the trustee to assets is no better than that of the bankrupt. Hewit v. Berlin, 194 U.S. 299, 24 Sup.Ct. 690, 48 L.Ed. 986; York Co. v. Cassell, 201 U.S. 350, 26 Sup.Ct. 481, 50 L.Ed. 782. It would have been impossible for the bankrupt to bring any suit to enforce the several statutory liabilities, under the Illinois law, against officers of the corporation. How, then, does the trustee succeed to any such right in the absence of any statutory authority?

The trustee by his objection sets up two statutory causes of action, based upon sections 16 and 18 of the Illinois statute, which appear in full in the statement of the case. The issue thus tendered by the trustee is to be regarded in the nature of a set-off, although not pleaded with technical accuracy. We cannot indulge a wholesale collateral attack upon the corporate existence of the bankrupt corporation to establish personal liability of Laskin as an officer thereof. It is elementary that such collateral attack cannot be sanctioned. The trustee must establish a legal or equitable cause of action based upon these statutes, with which he is invested. The question thus broadly presented is whether the trustee has any cause of action which he can advance as a set-off or defense to the claim. This requires an investigation of the statutes in question, and the construction that has been placed upon them by the highest court of Illinois.

By a long line of decisions in Illinois it has been held that section 16 is not penal, but remedial, in its nature; that it is intended to furnish creditors protection against the malversation of officers of a de jure corporation; that it is contractual in nature, and imposes upon corporate officers transgressing the law an obligation in the nature of suretyship, and that therefore it is to be strictly construed; that the effort of the statute is to provide a fund in the nature of a secondary security to which the creditors must resort; that it is peculiarly a...