Jennings v. Studebaker Sales Corp. of Am.

• Decision Date: 02 February 1934
• Docket Number: Nos. 84 and 143.,s. 84 and 143.
• Citation: 170 A. 626
• Parties: JENNINGS v. STUDEBAKER SALES CORPORATION OF AMERICA.
• Court: New Jersey Supreme Court

170 A. 626

JENNINGS

v. STUDEBAKER SALES CORPORATION OF AMERICA.

Nos. 84 and 143.

Court of Errors and Appeals of New Jersey.

Feb. 2, 1934.

Appeal from Supreme Court, Essex County.

Action by Arthur B. Jennings, receiver of the Broadney Corporation, against the Studebaker Sales Corporation of America, in which defendant filed a counterclaim. From an adverse judgment, defendant appeals.

Affirmed.

McCarter & English, of Newark, for appellant.

Arthur T. Vanderbilt, of Newark (Nathan L. Jacobs, of Newark, on the brief), for respondent.

BROGAN, Chief Justice.

This appeal concerns two cases that had the consideration of the trial court at the Essex County Circuit of the Supreme Court in each case, the plaintiff, Arthur B. Jennings, as receiver of the Broadney Corporation (formerly Ira C. Jones Company), brought suit against the Studebaker Sales Corporation of America, in the first, to recover money said to have been unlawfully paid to the defendant corporation, and in the second to recover money alleged to be due from the defendant to the said Broadney Corporation.

The cases will be considered in the order of their presentation.

First Case.

Between June 22, 1929, and December 28, 1931, the Ira C. Jones Company (now the Broadney Corporation, in the hands of a receiver) paid out by check, at diffetrent times, to the defendant the sum of $27,000 which the plaintiff charges the defendant received for the use and benefit of the Jones Company, in effect alleging the defendant was a constructive trustee. The complaint alleges that Mr. Jones, who controlled the Ira C. Jones Company, caused these moneys to be paid to the defendant out of the corporate funds, on account of his personal indebtedness to the defendant, Studebaker Sales Corporation of America, and that the defendant received this money, converting it to its own use, well knowing that it was the money of the Jones Company, and not the money of Jones, individually.

Defendant admits receipt of $27,000 and seeks to justify the payments on the ground that this sum in turn was charged against Mr. Jones on the books of the Jones Company; that it represented interest on the sum of $150,000 which the defendant had loaned to Mr. Jones on his note, claiming that the money was used in the business of the Jones Company.

The defendant also filed a counterclaim saying that on January 2, 1931, Mr. Jones delivered to it his promissory note in the sum of $150,000; that on that date Mr. Jones and the Jones Company, as first party, entered into an agreement with the defendant, as second party, reciting that the sum of $150,000 was loaned to Jones by the defendant, for the purpose of being used in the business of the Jones Company, and that said loan would be paid not later than October 31 1931; that payment had not been made and that there was a balance due of $129,030.15, which the defendant claimed as damages on the counterclaim. Parenthetically, it should be observed that the loan was actually made to Jones on January 2, 1929, and that the note of January 2, 1931, was a renewal.

Motion was made to strike out the answer and counterclaim as sham, and they were stricken and judgment entered in favor of the plaintiff and against the defendant for the amounts so paid which, with interest, totaled $31,428. The defendant appealed from this final judgment on the ground that the court erred in striking out the answer and counterclaim and in entering judgment for the plaintiff.

The appellant's position in this court is predicated on three points: First, that the affidavits submitted in support of the answer raised fact issues which should have gone to the jury. Second, that all of the stockholders of the Jones Company consented to the payments, and that the company, at the time, was solvent and no rights of creditors were involved. And, third, that the counterclaim was valid.

No useful purpose will be served by reciting in detail the sufficiency of the affidavits in support of the motion to strike out the answer and counterclaim and the insufficiency of the affidavits filed in their support. The affidavits, upholding the motion, make out a complete and exclusive portrayal of the corporation funds of the Jones Company being applied by Mr. Jones to discharge a personal obligation. Beginning with June 19, 1929, we find remainders, by letter, of the credit manager of the defendant corporation addressed to Mr. Jones personally, that the interest on his obligation of $150,000 was due and requesting payment. The affidavits lead to the inescapable conclusion that Mr. Jones borrowed this money from the defendant at the beginning of the year 1929, to buy out the interests of several stockholders of the Jones Company, and that at that time Mr. Jones delivered his personal note for the loan, concerning all of which the defendant had complete knowledge; that the defendant knew that the moneys paid to it on account of interest charges were funds of the Jones Company, since the checks were those of the corporation; that there were no moneys due to Mr. Jones personally from the Jones Company by way of salary, dividends, or otherwise, but that, on the contrary, Mr. Jones was indebted to the Jones Company for a large sum of money; further, that the sum borrowed by Mr. Jones personally from the Studebaker Sales Corporation of America was not at any time applied to the benefit of the Jones Company; that no action was taken by the board of directors of the Jones Company authorizing the execution of the agreement, dated January 2, 1931, wherein and whereby it is argued the Jones Company became answerable for the loan of $150,000 for which, according to the proof, it never received an atom of consideration. Therefore, there was no fact issue raised and the sufficiency of the pleading in answer was for the court and not for the jury to consider and it was properly stricken out. Eisele & King v. Raphael, 90 N. J. Law, 219, 101 A. 200; Wittemann v. Giele, 99 N. J. Law, 478, 123 A, 716; Meserole Securities Co. v. Dintenfass, 108 N. J. Law, 298, 156 A, 465.

The second point made by the appellant is that the stockholders of the Jones Company consented to the payment, that the corporation was solvent at the time, and that the rights of creditors or of the public were not involved. From the proofs before us, it cannot be said that all the stockholders of the Jones Company consented to these payments. The allegation is that the stock of the corporation was the property of Mr. Jones, individually, with the exception of the qualifying shares held by others who were directors. How many directors there were, does not appear, nor how much stock was owned by them. There is no proof that Mr. Jones, in the transactions complained of, had the sanction of the corporation by preliminary authority or subsequent ratification. Indeed, the very opposite is true, because the record discloses the sworn statement that the use of the corporate funds was not authorized by the board of directors of the Jones Company, and, further, that the agreement signed by Mr. Jones, as president of the Jones Company, purporting to obligate the Jones Company to pay the principal of the debt in question, was likewise without sanction. The money owed by Mr. Jones to the defendant was of no concern whatever to the Jones Company, and outside of the authority conferred by law or by the by-laws, upon Jones, as president, he had no power to bind the corporation any more than any other director.

The relation a director bears to a corporation is essentially fiduciary, and it does not require a code of regulation to inform such fiduciary officer what he may or may not do. Common honesty is the unfailing index to what is permissible and what is forbidden.

There is no affidavit from Mr. Jones, who was the principal actor in these transactions, and who doubtless could have thrown much light upon the question under investigation. The absence of such proof from him is, of course, not helpful to the defendant, and the inescapable inference is, unless he be dead, that his affidavit, if procured, would militate against his conduct in this situation, since here we have a plain picture of a conflict between self-interest and the interest of the corporation.

The appellant relies on the ease of Breslin v. Fries-Breslin Co., 70 N. J. Law, 274, 58 A. 313. There the question turned upon the doctrine of estoppel where the act subsequently complained of had had the unanimous consent and acquiescence of the stockholders. In that case, by the voluntary and unanimous act of the stockholders, they were all bound, and by the same token the corporation likewise became bound. In other words, a stockholder who, with his fellow stockholders, in unanimity, brought about corporate action which was formally irregular, will not be heard, having accepted the benefits of such action, in repudiation of it Branch v. Jesup, 106 U. S. 468, 1 S. Ct. 495, 27 L. Ed. 279; Thompson on Corporations (3d Ed.) § 3605. The case of New Jersey Car Spring & Rubber Co. v. Fields, 85 N. J. Law, 217, 88 A. 1031, is likewise urged in support of the appellant's position. There, too, the court determined that while the action under attack was irregular, it was not ultra vires; the contract in question having been assented to by all the stockholders, the payments under attack having been continued for more than six years, and the contract never having been challenged until after the death of the beneficiary. In that case, all the stockholders without exception made the contract. In the Fries Case all the stockholders acquiesced in the contract. Neither of these...