John Miller Co. v. Harvey Mercantile Co.

• Decision Date: 14 December 1917
• Citation: 38 N.D. 531,165 N.W. 558
• Parties: JOHN MILLER CO. v. HARVEY MERCANTILE CO., Limited, et al.
• Court: North Dakota Supreme Court

38 N.D. 531

165 N.W. 558

JOHN MILLER CO.

v.HARVEY MERCANTILE CO., Limited, et al.

Supreme Court of North Dakota.

Nov. 14, 1917.

Rehearing Denied Dec. 14, 1917.

Syllabus by the Court.

Under the sequestration proceedings which are authorized by section 7989 of the Compiled Laws of 1913, not only may numerous fraudulent grantees be joined as defendants with the corporation itself, but all officers and stockholders and other persons who have incurred a liability to the corporation. The purpose of the statute is to provide a means for collecting into a general fund all of the assets of an insolvent corporation so that not only the debt due to the petitioner may be paid, but that, if desired, all other debts of the concern, and that its affairs may be wound up.

The word “debtor,” in section 7218 of the Compiled Laws of 1913, which provides that “a debtor may pay one creditor in preference to another, or may give to one creditor security for the payment of his demand in preference to another,” includes corporations as well as general partnerships and individuals, and gives to corporations equally with individuals and general partnerships the general right to prefer one creditor above another.

An allegation in the complaint that an assignment of certain of the assets of an insolvent corporation was made to a trustee “in trust to convert into cash and distribute the proceeds, less collection charges, among the certain defendant creditors to apply on their claims against said corporation,” does not show an illegal transfer; there being no allegation either that the payment was in full and would exclude such creditors from recovering any balance that might be due, or that there was or was expected to be any surplus which was to be repaid to the debtor corporation, or that a general assignment was made or attempted.

Although an insolvent corporation may as a general rule prefer certain of its creditors, the assets of a corporation are nevertheless a trust fund for the payment of its debts to the extent that the creditors have a lien upon them which is prior in point of right to any claim which the stockholders or directors as such can have, and the courts should be astute to defeat any scheme or device which is calculated to withdraw this fund or in any way to place it beyond the reach of creditors.

A complaint states a cause of action against both the directors of an insolvent corporation and its favored creditors, which charges that a scheme was planned and participated in by all of the defendants to place all of the property and assets beyond the reach of the plaintiff creditor and other creditors similarly situated, to convey to the directors certain of the assets and to make unlawful payments thereto, and generally to divide all of its assets between the said directors and the said favored creditors.

Additional Syllabus by Editorial Staff.

Under Comp. Laws 1913, § 7989, providing that a judgment creditor of a corporation “may maintain an action to procure a judgment sequestrating the property” of the corporation, the word “sequestrating” involves a seeking out as well as a setting apart, and the action authorized is similar to a creditor's bill (citing Words and Phrases, Sequestrate).

Appeal from District Court, Wells County; J. A. Coffey, Judge.

Action by the John Miller Company against the Harvey Mercantile Company, Limited, and the Great Northern Implement Company and others. Demurrer to complaint overruled, and the Great Northern Implement Company and others appeal. Order affirmed.Fred B. Dodge and Frank R. Hubachek, both of Minneapolis, Minn., and Edward P. Kelly, of Carrington, for appellants. Pierce, Tenneson & Cupler, of Fargo, for respondent.

BRUCE, C. J.

This is an appeal from an order overruling a demurrer to a complaint. The action is brought under articles 2 and 4 of chapter 27 of the Code of Civil Procedure, and particularly section 7989 et seq. of the Compiled Laws of 1913, and is known as a sequestration proceeding; its purpose being to obtain an equal distribution of the property of an insolvent corporation among its various creditors.

The complaint alleges the incorporation of the defendant the Harvey Mercantile Company, the ownership of its capital stock by the defendants Sayre, Strong, Beiseker, and Sayre, Strong Grain & Merchandise Company; that on or about the 21st day of January, 1913, and the 3d day of February, 1913, the plaintiff, the John Miller Company, obtained judgments against the defendant Harvey Mercantile Company in the sum of about $5,222.87, and on which unsatisfied executions leave a balance of $4,665.38, with interest. It further alleges that on the 3d day of November, 1910, the defendants Phillips, Sayre Strong, and Beiseker were stockholders, directors, and managing officers of the said Harvey Mercantile Company, and did then and there, without dissolving and winding up said corporations and without paying or providing in any manner for the payment of it the said John Miller Company, and with the intent of defrauding it and such other creditors as were similarly situated, and hindering and delaying them in the execution of their judgments and claims, wrongfully and unlawfully assigned and delivered to the defendant James T. Morris, as agent of the defendant creditors, or to themselves, the said Phillips, Sayre, Strong, and Beiseker, or all of them, in trust to convert into cash and to distribute the proceeds among the said defendant creditors, all of the notes, bills receivable, and accounts of the defendant corporation of the face value of $26,000 and $11,000 in money, and also traded the stock of merchandise of said corporation of the alleged value of $32,800 for an equity in real estate in Canada, which it caused to be conveyed, and to be held in the name of the Calgary Colonization Company, all of the stock of which was and is owned by the said Phillips, Sayre, Strong, and Beiseker, and of which the said defendants were and are officers and directors, and unlawfully transferred and conveyed to the defendant H. H. Phillips the balance of the corporate assets of said Harvey Mercantile Company, which remained in the state of North Dakota, all of such transfers being made without any consideration passing to the said corporation; that all of such transfers were made in furtherance of the same fraudulent and unlawful scheme and were intended to and did effectually place all of the property and assets of said corporation beyond the reach of the said John Miller Company and other creditors similarly situated by the ordinary process of law; that each of the persons and corporations who took said property and money had knowledge prior to the transfer of the fraudulent and unlawful scheme and participated therein; that, by the acts of the defendants, all of the property belonging to the said Harvey Mercantile Company was divided and transferred, and no property was left for the payment of the claims and judgments of the said plaintiff, John Miller Company, and others, and that said Harvey Mercantile Company was at the times thereof, and ever since has been, and now is, insolvent, and has never since said time conducted any business, and that the said John Miller Company has no adequate remedy at law in the premises. It further alleges that the defendant James T. Morris received said cash payment of $11,000 and about $25,000 from the proceeds of the notes, bills, and accounts, and has paid over and distributed about $21,000 to a number of the defendants named, and that the defendants James T. Morris, H. H. Phillips, A. J. Sayre, L. P. Strong, and T. L. Beiseker have in their possession or control notes, bills, and accounts of the value of about $8,889, and the German State Bank of Harvey has of these notes the sum of the face value of $7,102 for collection.

The complaint further alleges that the said stock of merchandise represents only a part of the purchase price of the Canadian land, and that the balance thereof was paid by the defendants Phillips, Sayre, Strong, and Beiseker or the said Calgary Colonization Company, and that the management and disposition of said real estate has been in the defendants' name, and that the defendants by such act intended to place the property beyond the control of the courts. It further alleges that all of the capital stock of the said Harvey Mercantile Company was not fully paid for, and that the stock was issued to the defendants Phillips, Sayre, Strong, and the Sayre, Strong Grain & Merchandise Company, with the knowledge and without the dissent of the said defendants Phillips, Sayre, Strong, and Beiseker. It further alleges that the defendants Phillips, Sayre, Strong, and Beiseker, when acting as officers and directors of the defendant the Harvey Mercantile Company, misused the assets of said company and distributed the same unlawfully, and between the years 1906 and 1910 paid to the defendant H. H. Phillips large sums of money of the alleged sum of $5,000 in excess of the compensation provided for by the by-laws and resolutions, and the indebtedness of said corporation, to the said Phillips for his salary and commission when acting for said company.

The complaint further alleges that the defendants Phillips, Sayre, Strong, and Beiseker, while directors of said Harvey Mercantile Company, during the years 1906 to 1910, inclusive, unlawfully paid to themselves and to other stockholders large sums of money; the exact amount being unknown. It further alleges that in November, 1910, said defendants H. H. Phillips, A. J. Sayre, L. P. Strong, and T. L. Beiseker decided to wind up the affairs of the corporation, and then and there, without dissolving and winding up the affairs of said corporation in the manner provided by law and without paying or providing for the payment of the claims of the plaintiff, divided and distributed all of the capital stock, property, and assets of said corporation among themselves and certain other...