Keedy v. Sterling Electric Appliance Company

• Citation: 13 Del.Ch. 66,115 A. 359
• Court: Court of Chancery of Delaware
• Decision Date: 31 October 1921
• Parties: CHARLES C. KEEDY, Receiver of Sterling Electric Company, v. STERLING ELECTRIC APPLIANCE COMPANY, a corporation of the State of Delaware

115 A. 359

13 Del.Ch. 66

CHARLES C. KEEDY, Receiver of Sterling Electric Company, v. STERLING ELECTRIC APPLIANCE COMPANY, a corporation of the State of Delaware

Court of Chancery of Delaware, New Castle

October 31, 1921

BILL TO SET ASIDE A TRANSFER OF PERSONAL PROPERTY. The complainant, as receiver of Sterling Electric Company, filed this bill against Sterling Electric Appliance Company praying that the sale and transfer by the Electric Company to the Appliance Company of certain property and assets be decreed to be fraudulent, and that said property and assets be decreed to be the property and estate of the Electric Company in the hands of the complainant, its receiver, for the benefit of its creditors and stockholders.

The cause was heard on bill, answer and testimony of witnesses heard orally before the Chancellor. The facts, about which there is very little dispute, are as follows:

The Sterling Electric Company was organized for the purpose of doing a business of dealing in electric washing machines electric fixtures and appliances of various kinds. Its business did not prosper, and by November, 1920, it was in an insolvent condition. Its officers, upon the advice of one of its principal directors, thereupon organized a new corporation, the defendant, herein called the Appliance Company, for the purpose of taking over a considerable portion of its assets. The officers of the Electric Company became the officers also of the Appliance Company. Both corporations were, therefore, controlled by the same individuals. The Electric Company while insolvent transferred certain merchandise, equipment, etc., valued at $ 3,825.00 to the Appliance Company and also certain so-called lease contracts evidencing sales of electric washing machines, the face value of which leases was $ 6,775.61. In return for this transfer and as consideration therefor, the Appliance Company issued to the Electric Company one hundred and fifty-three shares of its capital stock of the par value of $ 3,825.00 and agreed to assume the Electric Company's liabilities in connection with the leases in the sum of $ 3,347.55, as well as an obligation to supply labor and materials in keeping the electric machines in repair. The liabilities and obligations to repair, however, continued as against the Electric Company.

The bill charges, and the answer admits, that at the time of this transfer the Electric Company was insolvent, its liabilities greatly exceeding its assets, including this property, and that both companies, through their respective officers, had actual or constructive knowledge of these facts. At the time of the transfer the Electric Company's balance sheet showed assets of $ 20,910.54 and liabilities of $ 59,429.31.

A short time after the organization of the Appliance Company, its officers issued two hundred and forty shares of its capital stock ($ 6,000.00 par) to themselves, the company receiving therefor the individual notes of the officers for the par value of their respective shares. No money has ever been paid on account of these notes, the officers crediting them with weekly allotments from salaries. The amounts so credited on the notes aggregate nine hundred and sixty dollars. The business of the Appliance Company has been conducted at the same location as that conducted by the Electric Company prior to the transfer by it of its assets to the Appliance Company.

Under this state of facts the complainant charges that the transfer of the assets by the Electric Company to the Appliance Company was in fraud of the creditors of the Electric Company and, therefore, void.

It is further charged that the alleged sale and transfer was fraudulent and void as against creditors because there was no attempt to comply with the so-called "Bulk Sales Act" of this state, approved April 17, 1917, being Chapter 222 of Volume 29 Laws of Delaware.

George N. Davis, for the complainant.

Edmund S. Hellings, for the defendant.

OPINION

THE CHANCELLOR

The original "Bulk Sales Act" (Chapter 387 Volume 22, Laws of Delaware) was approved March 24, 1903. This act appears as par. 2638 (Section 18) of the Revised Code of 1915. It provided that "a sale of any portion of a stock of merchandise otherwise than in the ordinary course of trade in the regular and usual prosecution of the seller's business, or a sale of an entire stock of merchandise in bulk, will be presumed to be fraudulent and void as against the creditors of the seller," unless an inventory of the goods is made showing the cost price, and unless the purchaser shall at least five days before the sale inquire of the seller as to the names, addresses of all creditors and the amount owed to each, and obtain from the seller a written answer to such inquiry; and unless the purchaser shall retain such inventory and written answer for at least six months and also, at least five days before the sale notify, or cause to be notified, each of the seller's creditors of the proposed sale, the cost price of the merchandise and the price to be paid therefor. If the seller makes false answer to the inquiry made of him by the purchaser, he is declared to be guilty of a misdemeanor. The act excepts from its operation sales by executors administrators, receivers or any public officer acting in his official capacity.

The original act was re-enacted by Chapter 222, Volume 29, Laws of Delaware, approved April 17, 1917, with this one addition by way of amendment, viz. if the purchaser wilfully fails to make the inquiry of the seller as above described and to obtain the written answer thereto from the seller, or if the purchaser wilfully fails to give the prescribed notice to the seller's creditors, he is guilty of a misdemeanor, punishable by fine of not over one thousand dollars or imprisonment not exceeding five years, or both in the discretion of the court.

Neither the seller nor the purchaser made any effort to comply with this law. Failure to do so undoubtedly prejudiced the rights of creditors. One of the large creditors knew of the proposed sale. In fact, it was on the advice of this creditor that the new corporation was formed and the assets transferred. But at least two other large creditors and other creditors in the amount of from three thousand dollars to four thousand dollars were ignorant of the fact. The sale clearly falls within the condemnation of the statute, and is thereby stigmatized as fraudulent and void as against creditors.

In many of the states statutes of this character declare that the sale is not presumed to be, but is fraudulent and void. Authorities in such states are, therefore, of no value in construing the Delaware act, for in this state the statute declares that the sale is "presumed" to be fraudulent and void. Again, a statute such as is found in Georgia, where it is declared that the sale is "conclusively" presumed to be fraudulent, renders the decision of the Supreme Court of that state in Jaques & Tinsley Co. v. Carstarphen Warehouse Co., 131 Ga. 1, 62 S.E. 82, of no interpretative value in DeLaware, at least so far as the nature of the presumption is concerned.

In Maryland, Illinois, Minnesota and Wisconsin the statutes are similar to the Delaware act, in that the sale is declared to be "presumed" to be fraudulent. The courts of last resort in those states have held that the presence of the words "presumed to be" in the statute makes the presumption a rebuttable one. Hart v. Roney, 93 Md. 432, 49 A. 661; Fisher v. Herrmann, 118 Wis. 424, 95 N.W. 392; Baumeister v. Fink, 141 Ill.App. 372; Thorpe v. Pennock Mercantile Co., 99 Minn. 22, 108 N.W. 940, 9 Ann. Cas. 229.

In each of those states, however, the statute contained a clause, not found in the Delaware act, providing in substance that except as therein provided, nothing in the act should affect or change the present rules of evidence or presumptions of law. The Court of Appeals of Maryland observed the presence of this clause, and found therein confirmation of its view that the statute was meant simply to create a presumption available to creditors who might seek to assail the transaction as fraudulent, a presumption, however, which was rebuttable by proof that the transaction was bona fide. In other words, it was held that the statute was designed solely to place the burden of proof on the purchaser to show that there was no fraud, instead of leaving the burden, as it was before, on the creditors to establish the fraud.

In the other states above mentioned, where a clause similar to the one in the Maryland act is found, the courts reach the same conclusion, though no special mention is made of the significant clause. The presence of such a clause in the statutes of those states must, however, have been given some interpretative value. At all events, the absence of this clause from the Delaware act is a distinguishing feature which differentiates our act from the acts in those states, and the rulings in those jurisdictions accordingly cannot be as persuasive here as they might otherwise be.

In Mississippi, South Carolina and Tennessee, however notwithstanding the presence in their statutes of a clause declaring that, except as provided therein, nothing in the act should be construed to alter or change the existing rules of evidence, or the existing presumptions of law, the Supreme Court of each of these states held that the presumption of fraud, in case no attempt was made to observe the requirements of the act, was conclusive and no evidence could be received to show the bona fides of the transaction. Moore Drygoods Co. v. Rowe, et al., 97 Miss. 775, 53 So. 626; (on rehearing) 99 Miss. 30, 54 So. 659, Ann. Cas. 1913C, 1213; National City Bank v. Huey & Martin Drug Co., et al., 113 S.C. 333, 102 S.E. 516; Cantrell...