Jennings Neff & Co. v. Crystal Ice Co.

• Decision Date: 11 October 1913
• Citation: 159 S.W. 1088,128 Tenn. 231
• Parties: JENNINGS NEFF & CO. v. CRYSTAL ICE CO. et al.
• Court: Tennessee Supreme Court

159 S.W. 1088

128 Tenn. 231

JENNINGS NEFF & CO. v. CRYSTAL ICE CO. et al.

Supreme Court of Tennessee.

October 11, 1913

Appeal from Chancery Court, Hamilton County; T. M. McConnell, Judge.

Bill in equity by Jennings Neff & Company against the Crystal Ice Company and others. From a decree in favor of the complainants, defendants appeal. Affirmed.

Sizer Chambliss & Chambliss, of Chattanooga, for appellants.

W. B Miller, of Chattanooga, for appellees.

GREEN J.

The Crystal Ice Company, prior to 1910, operated two ice plants in the city of Chattanooga. Its properties were valued at about $300,000. It is not clear from the record just how many bonds it had outstanding; the amount was certainly not more than $90,000, however. Its current indebtedness seems to have been about $13,000. The net value of its assets, therefore was in the neighborhood of $200,000. It was a Georgia corporation.

By two conveyances dated February 1, 1910, and November 11, 1910 respectively, the Crystal Ice Company transferred all its property of every description to the Atlantic Ice & Coal Corporation, which latter concern was chartered under the laws of Virginia. By the first conveyance above referred to, the plants operated by the Crystal Company were transferred to the Atlantic Company, and the former company ceased its business of manufacturing ice. It appears to have retained, however, its office for the purpose of collecting accounts and other similar matters, and by the second conveyance above referred to, on November 11, 1910, all its choses in action, bills receivable, a contingent interest in some litigated property, and all remaining assets were transferred to the Atlantic Company. After the second conveyance, while the Crystal Ice Company remained a corporate entity, it was a mere shell, having no property of any description.

Prior to February 1, 1910, the date of the first conveyance above mentioned, the complainants herein had brought suit against the Crystal Company in the courts of Hamilton county, and this suit was pending when the Crystal Ice Company was absorbed by the Atlantic Company in the manner just stated. A judgment was recovered against the Crystal Company by the complainants on April 21, 1911, and this judgment was affirmed by this court at the September term following, the amount thereof being $2,786.81 and costs. Execution was issued upon this judgment and was returned nulla bona; the Crystal Company being without assets at this time.

Aside from some $13,000 of its debts which were assumed by the Atlantic Company, the only consideration received by the Crystal Company for its assets was stock and bonds of the Atlantic Company. These securities of the absorbing company were turned over to the Crystal Company at the ratio of $1.75 for every $1 of its own stock. The transfer seems to have been effected through a Georgia trust company, and the securities of the Atlantic Company were distributed to the stockholders of the Crystal Company from Atlanta. Practically all of the stockholders of the Crystal Company resided in Georgia.

The complainants filed this bill in the chancery court of Hamilton county, seeking to reach certain real estate in Chattanooga transferred in this deal by the Crystal Company to the Atlantic Company, and also to reach a certain fund in the hands of the Nashville, Chattanooga & St. Louis Railway, assigned by the Crystal Ice Company to the Atlantic Ice & Coal Company, and to subject this land and this fund to the satisfaction of their judgment against the Crystal Ice Company. It amounted to something over $6,000, and was withdrawn by the Atlantic Company, a bond being substituted therefor.

The chancellor sustained complainants' suit and gave them a decree on the above mentioned bond for the amount of their judgment and interest, and the Atlantic Company has appealed to this court.

From the foregoing, it is seen that we have presented to us a case in which one corporation has acquired practically the entire assets of another in exchange for the stock and bonds of the purchasing company. The selling company retains no property and goes out of business. This is not, strictly speaking, a legal merger because the selling company retains its legal entity, although it is entirely dismantled of its assets. Such a transaction is sometimes referred to as a de facto merger. Where the merger be de facto or de jure, the plight of the creditors of the absorbed corporation is the same. No property is left out of which they may satisfy their claims in either case in the hands of the selling corporation.

We think the chancellor's decree was correct.

It is insisted for appellant that where a corporation transfers all its assets to another corporation for a fair and adequate consideration, and both corporations maintain a separate existence, in the absence of fraud, the purchasing corporation will not be liable for the debts of the other.

The doctrine that corporate assets are a trust fund, at least to the extent that creditors are entitled in equity to payment of their debts before any distribution of corporate property is made among stockholders, is fully established in Tennessee, and creditors have a right to follow its assets or property into the hands of any one who is not a holder in good faith in the ordinary course of business. Vance v. McNabb Coal & Coke Company et al., 92 Tenn. 47, 20 S.W. 424; Pomeroy's Equity Jurisprudence, § 1046.

There is abundant authority likewise for the proposition that where one corporation, for its own stock and bonds, purchases all the assets of another, without provision for the debts of the latter, the transaction is out of the ordinary course of business, and the very circumstances of the case imply full knowledge on the part of the purchasing corporation of all facts necessary to charge the property in its hands with the debts of the selling corporation. Thompson on Corporations, § 6547; 10 Cyc. 1267; Altoona v. Richardson Gas & Oil Co., 81 Kan. 717, 106 P. 1025, 26 L. R. A. (N. S.) 651; Grenell v. Detroit Gas Co., 112 Mich. 70, 70 N.W. 413.

We may further observe that suit was pending on this particular demand at the time of the absorption of the properties of the Crystal Company by the Atlantic Company. Moreover, in the contract whereby certain of the Crystal's property was transferred, a number of its debts were scheduled, and it was agreed that the Atlantic Company should assume payment of the debts named, "and none other." The implication is unavoidable that the Atlantic Company knew of the existence of claims against the Crystal other than those it assumed, and undertook to relieve itself of liability for same by contract. We must conclude that it had both actual and constructive notice of such unpaid debts.

It follows that when this purchasing corporation took over in exchange for its own stock and bonds the assets of the other, and permitted these securities which it had substituted for the visible, tangible property of the selling corporation to be distributed among the shareholders of the latter, without provision for the creditors of the latter, it thereby became a party, with full notice, to the diversion of a trust fund. As such, the purchasing corporation holds the property so acquired impressed with the same trust with which said property was originally charged, and the purchasing corporation is liable to the creditors of the selling corporation to the extent of the value of the property thus obtained.

Creditors of the old corporation cannot be required to look alone to the stock and bonds which were substituted for the real tangible assets of that corporation. The...