Larrabee v. The Franklin Bank

• Decision Date: 14 March 1893
• Citation: 21 S.W. 747,114 Mo. 592
• Parties: Larrabee et al., appellants v. The Franklin Bank et al., Appellants
• Court: Missouri Supreme Court

21 S.W. 747

114 Mo. 592

Larrabee et al., appellants v. The Franklin Bank et al., Appellants

Supreme Court of Missouri, Second Division

March 14, 1893

Appeal from St. Louis City Circuit Court. -- Hon. J. E. Withrow Judge.

Affirmed.

P. F Coste for appellants.

(1) It is a well settled rule in this state that a preference of a bona fide creditor by an insolvent debtor is lawful and valid, and a corporation debtor has hitherto not been excepted from this rule. Foster v. Planing Mill, 93 Mo. 79; Shelly v. Boothe, 73 Mo. 74; Dougherty v. Cooper, 77 Mo. 528. (2) The recent theory that an insolvent corporation which contemplates an abandonment of its business cannot lawfully prefer a bona fide creditor is not based upon sound reasoning and should, if at all deemed an advisable restriction upon the common law of corporations be promulgated and supported by statutory enactment, as it has been in other states. The weight of authority is opposed to the attempted distinction between an insolvent corporation and an insolvent individual as to the common-law right of preferring a bona fide creditor. Catlin v. Bank, 6 Conn. 233; Smith v. Skeary, 47 Conn. 47; Dana v. Bank, 5 Watts & Sergeant 223; State v. Bank, 6 Gill & Johnson 205; Ringo v. Biscoe, 13 Ark. 563; Bank v. Whittle, 78 Va. 737; Dabney v. Bank, 3 S.C. 156. (3) 1 Beach on Corporations [Ed. 1891] sec. 358, p. 582, says: "A corporation through a majority of its directors may make a transfer of all its property in payment of one creditor, if it be done bona fide;" citing, Buell v. Buckingham, 16 Iowa 284; Town v. Bank, 2 Doug. (Mich.) 530; State v. Bank, 6 Gill & Johnson 205; Bank v. Morris, 6 Gill & Johnson 363; Catlin v. Bank, 6 Conn. 233; Sargent v. Webster, 13 Met. 497. (Same author, Vol. I., p. 582): "Such a debtor corporation may prefer one creditor to another;" citing, Niolon v. Douglass, 2 Hill Ch. 443. (4) The payment of the Franklin bank and the subsequent assignment of the Cracker company for the benefit of its creditors are two separate and distinct acts and cannot be construed as one and the same act, that is, as one assignment for creditors, so as to have the effect of rendering the payment to the bank void as being a preference of a creditor in a voluntary assignment made under the statute. Sampson v. Shaw, 19 Mo.App. 274; Hargadine v. Henderson, 97 Mo. 375. The question seems to have been raised also in other states under similar statutes, and it has been held that the two acts will not be construed as one general assignment. Watch Co. v. Meyer, 30 F. 659; Gilbert v. McCorkle, 110 Ind. 215; Mfg. Co. v. Smith, 8 N.H. 348; Low v. Wyman, 8 N.H. 536; Barker v. Hall, 13 N.H. 298; Henshaw v. Summer, 23 Pick. 446; Bates v. Coe, 10 Conn. 280; Worman v. Wolfersberger, 19 Pa. St. 59; Lampson v. Arnold, 19 Iowa 479. (5) This being a proceeding on a creditors' bill, no distribution should have been ordered by the judgment and decree to creditors who have not had the diligence to make themselves parties to this suit.

J. M. Holmes for respondents.

(1) The transfer of the accounts to the bank and of the stock to Mr. Moll, and the deed of assignment to Mr. Flitcraft, were parts of one entire transaction, to-wit, a general assignment, under the statute, for the benefit of creditors. The transfers of the accounts and of the proceeds of the stock to the bank must be construed as though such transfer had been incorporated in the deed of assignment. White v. Cotezhausen, 129 U.S. 338; Hard v. Foster, 98 Mo. 297; Clapp v. Nordmeyer, 25 F. 71; Weil v. Pollack, 30 F. 813; Berry v. Cutts, 42 Me. 445; Holt v. Bancroft, 30 Ala. 200; Perry v. Hoeden, 22 Pick. 269; Mussey v. Noyes, 26 Vt. 471; Van Horn v. Smith, 59 Iowa 142; United States v. Bank, 8 Rob. (La.) 302; Claflin v. McLaughlin, 65 Pa. 33; Wallace v. Wainrwight, 87 Pa. 263; Letcher v. Stapner, 2 Duv. 423; Wilson v. Snelling, 3 Bush 322. (2) At the date of the transfer of the accounts and the proceeds of the stock to the bank, the insolvency of the Cracker company had been ascertained and established, and the company had resolved to quit business and make an assignment. These facts were known to the bank and its officers. The transfers to the bank were not made in due course of business, but were distributive payments, made in fraud of the rights of other creditors in the assets of the Cracker company, and, in making such payments, the directors of the Cracker company exceeded their powers. Wood v. Dummer, 3 Mason, 308; Rouse v. Bank, 46 Ohio St. 493; Eppright v. Nickerson, 78 Mo. 490; Foster v. Bank, 92 Mo. 90; Roan v. Winn, 93 Mo. 503; Marr v. Bank, 4 Caldwell, 471; Taylor on Private Corporations sec. 759; Morawetz on Corporations, sec. 803; Wait on Insolvent Coporations, sec. 162; Richards v. Ins. Co. 43 N.H. 263; Haywood v. Lumber Co., 64 Wis. 639; Clyne v. Canal Co. 24 How. 262.

OPINION

Burgess J.

This is a suit in equity in the nature of a creditor's bill by three creditors of the Kendall-Boyce Cracker Company, joined as plaintiffs, against the Franklin bank, the Kendall-Bayle Cracker Company, its officers and directors, and P. R. Flitcraft, as assignee of the Kendall-Bayle Cracker Company, for the benefit of its creditors. The defense consists mainly in a denial of the allegations and charges of the bill.

The Kendall-Bayle Cracker Company was a corporation engaged in the manufacture and sale of crackers in the city of St. Louis. The stock of the company was full paid, and was owned in nearly equal proportions by Messrs. Kendall, Bayle, Daniels and Cole. The business of the company, at first prosperous, was conducted for a considerable period at a loss, and for some months prior to January, 1888, the company was in a very precarious financial condition. In December, 1887, the company owed to the Franklin bank $ 20,000, which was evidenced by several notes, a portion of which was indorsed by Mr. Cole and the remainder by Mr. Kendall, both of whom were directors of the company. It owed nearly the same amount to what may be termed outside creditors, amongst whom were plaintiffs, and these debts were wholly unsecured. They had assets of the value of about $ 15,000, divided in about the following proportions:

Stock on hand

$ 7,000

Good accounts

5,000

Leasehold, machinery and odds and ends

3,000

The company was hopelessly insolvent and could no longer go on unless matters should change in some manner. To furnish a possible means of raising fresh capital, Bayle & Daniels surrendered their stock to the company for $ 1 each and retired. This situation was well known to the bank and its directors, and they knew that, unless fresh capital could be secured or better prices obtained for their crackers, the company would be compelled to suspend. They knew also that the only chance for obtaining better prices for the product of the company lay in the action of the "cracker pool," which was to meet in January. They had a secret arrangement with the cracker company by which they were to be notified, when failure should take place, in time to protect themselves. Such was the situation in December, 1887. In the second week in January, 1888, a statement was submitted to the bank from which it appeared that the company was still loosing money. Notice was then given by the bank to the company, that, unless the coming meeting of the "cracker pool," for which the bank agreed to wait, should relieve them, they must furnish additional security for the note next maturing -- January twenty-sixth or twenty-seventh -- or they would be "closed." The "cracker pool" met and refused to advance prices, the directors refused to indorse further and the concern was at an end.

The directors of the company held a meeting on Thursday, the twenty-sixth of January, resolved to cease business and make an assignment. They instructed their attorney to prepare a deed of assignment, which he did, leaving the date blank. The deed was an ordinary assignment under the statute. On the same Thursday, or possibly on the morning of Friday, the twenty-seventh (the evidence is not clear as to which day) the directors of the company, accompanied by their attorney Mr. Mills, went to the bank and notified them of their failure and of the fact that an assignment had been determined upon. The directors of the company, the attorney and the officers of the bank then entered into a consultation to determine the best method of "protecting the bank," and securing for it a preference over other creditors. Mr. Mills was of the opinion that the best method was to attach, as, in his opinion, any plan which required the visible co-operation of the company would be dangerous. Mr. Garrells, the cashier of the bank, had, however, another plan. He was willing to "take the chances." The assets of the company consisted of a leasehold and machinery of small value (the machinery, with various odds and ends proved to be worth $ 1,500, and the leasehold proved to be worth $ 100 less than nothing), the stock on hand, manufactured and unmanufactured, good debts and bad debts. There was no money. Mr. Garrells had previously arranged with Mr. Moll, his co-director in the bank, and a co-defendant in this case, a method for turning the stock into money. His proposition then, at the meeting, was that the bank should take the stock and the good debts, and the assignee should take the machinery and the bad debts. He explained that drafts could be drawn by the company against all its solvent debtors, and turned over to the bank, and that Mr. Moll, one of its directors, could take the stock, thus converting it into money which would be paid over to the bank. This proposition was accepted. Mr. Moll was called up and reached the bank at the conclusion of the conference. He and Mr. Garrells then went to...