Lee v. Hercules Powder Co.
| Decision Date | 16 May 1928 |
| Citation | 219 N.W. 565,56 N.D. 800 |
| Court | North Dakota Supreme Court |
Appeal from the District Court of Morton County, Berry, J.
Affirmed.
Judgment of the district court affirmed with costs to respondents.
W. H Stutsman, for appellants.
A corporation is a legal entity, and ordinarily will be treated as distinct from its membership. But a court of equity will look beyond this technical doctrine of existence independent of its shareholders when the rights of the parties require it. Especially is this true with respect to the rights of creditors. Re McCarthy Portable Elevator Co. 196 F. 247. See also Morawetz, Priv. Corp. 2d ed. 227, 229, 231 and 818.
If the corporation is insolvent, the directors are trustees for the creditors as well as the stockholders. Johnson v. United R. Co. 281 Mo. 90, 219 S.W. 38; Wabash Co. v. Iowa Co. 200 Iowa 334, 202 N.W. 595.
A purchase of corporation assets at a judicial sale by a director with knowledge that the company is insolvent may be avoided by a creditor. Jones v. Arkansas, 35 Ark 17.
A director or managing officer is precluded by his position from acquiring any interest in property adverse to that of the corporation. Where he does so he will be deemed to hold as a trustee for the stockholders. 14 C. J. 121.
Alfred Zuger and C. Liebert Crum, for respondents.
"Where the cestui que trust cannot be injured, by reason of his title being entirely gone, the purchase of the trustee cannot and ought not to be held subject to the trust which is virtually extinguished by the destruction of its subject-matter, unless the conduct of the trustee, or some advantage he acquires by reason of this relation, should warrant the courts in creating a new trust, or extending the old one so as to embrace a new title." Heirs v Evans, 26 Mo. 30.
ENGLERT, Dist. J. CHRISTIANSON, BIRDZELL, BURKE, and BURR, JJ., concur. Mr. Chief Justice NUESSLE did not participate, Honorable M. J. ENGLERT, Judge of the First Judicial District, sitting in his stead.
The plaintiffs brought this action to quiet title to the west half and the northeast quarter of section twenty-two; and the west half of section twenty-one, all in township one hundred thirty-eight, north of range eighty-eight, west of the fifth P. M., in Morton county, North Dakota. The complaint is in the form provided for by statute to determine adverse claims or possession to real property.
The plaintiffs base their title upon a certain judgment wherein Hercules Powder Company, a corporation, was plaintiff, and the Spring Valley Products Company, a corporation, was defendant, entered on the 23d day of December, 1922, for the sum of $ 1,387.60. The defendants mentioned in the caption of the complaint did not answer, and judgment was taken against them by default. B. H. Deters, Rachel N. Deters, W. F. Deters, Alvin W. Defiel, Charles A. Mull, E. A. Sprague, A. F. Gumphrey, Mrs. A. F. Gumphrey, E. J. Foss, A. Holritz, John S. Lomman, H. E. Aldrich, Isaiah Coffman, C. A. Arpke, T. McHaffie, W. H. Stutsman, C. G. Knoefel, Edwin J. Stegner, Arthur Stegner, Laura E. Stegner, E. W. Ostergren, Dan Ostergren, John Christianson, H. G. Gervig, J. A. Gervig, David Cannell, Esther Cannell, and Theodore Matthieu were proceeded against as unknown defendants, and they appeared and answered, setting forth: (1) that the Spring Valley Products Company executed and delivered to one Frank Reed, as trustee, on May 1, 1923, a trust mortgage, on the land here in question, to secure 250 promissory notes, aggregating $ 50,000, and that these defendants were purchasers and are holders of said notes, and that the then board of directors of the Spring Valley Products Company was in duty bound to pay the said Hercules judgment, and other liens and mortgages, so that the said trust mortgage would be a first lien upon the premises; and (2) that the plaintiffs were stockholders and officers of the Spring Valley Products Company and its successor, the Glen Ullin Coal Company, and active in the management of its business, and secured title to the premises here involved, "for the sole purpose and with the inevitable effect of defrauding the beneficiaries of said trust deed and of depriving them of the security guaranteed to them in said trust deed." The defendants pray that the trust mortgage be adjudged a valid lien upon the said property, prior and superior to the rights and claims of the plaintiffs, and that the plaintiffs' claim and title be adjudged null and void.
The trial court found that the plaintiffs are the owners in fee simple of the property here involved, and that the defendants have no estate, right, title, claim or interest in the said property, and entered judgment quieting the title to said premises in the plaintiffs. The answering defendants appealed from that judgment and have asked for a trial de novo here.
The Spring Valley Products Company was incorporated under the laws of North Dakota on January 12, 1920, with principal place of business at Glen Ullin, North Dakota. It purchased the land in question for the purpose of operating a coal mine on a large scale. In order to take care of pressing claims, mortgages and liens, it was then decided to raise $ 50,000 by giving a trust mortgage to one Frank Reed, as trustee, on the land in question, and all machinery, tools, supplies, live stock, and all other personal property owned and kept by said company on said land. The mortgage was executed on May 1, 1923, and recorded June 15, 1923. It secured two hundred fifty promissory notes, all dated May 1, 1923, bearing 7% interest, and due May 1, 1928. The notes were divided into the following series and amounts:
Series A.
Series B.
Series C.
Series D.
Series E.
The trust mortgage provided that Frank Reed, as trustee, should hold the mortgage in trust for such persons as should purchase the notes secured thereby, and should receive and pay over to the mortgagor all moneys received from the sale of said notes. It provided that the company should set aside two thousand dollars on January 1, 1924; four thousand dollars on January 1, 1925; six thousand dollars on January 1, 1926; and eight thousand dollars on January 1, 1927, as an amortization fund to be applied by the trustee upon said notes. It empowered the purchasers of said notes to make by-laws, rules and regulations relative "to the carrying out of the terms and provisions of this mortgage; . . . it is agreed that they may form an association and establish a constitution and by-laws for the carrying out of any action that they may deem necessary to take in order to conserve their collective interests under this mortgage." The mortgagor therein covenanted that the property "is free and clear of all encumbrances and liens whatsoever except mortgages and liens of record." In addition to the usual terms of a promissory note, the trust notes had printed on the face thereof a detailed description of all the property securing the same. It was the understanding that the money raised on the sale of those notes should be placed in escrow in the Bismarck Bank until the amount of $ 30,000 was realized. It was then to be paid over to the Spring Valley Products Company. If that amount was not raised by June 16, 1923, the amounts paid in were to be returned to the respective purchasers of said notes. It was the general understanding that the indebtedness of the company, including liens and judgments, was to be paid from the money realized on a sale of the trust notes.
The record is not clear as to just how much in actual cash was raised on the sale of those notes. There are various reports showing that $ 32,200 was subscribed for. But the greater portion of that amount consisted of promises to buy and promises to exchange old indebtedness for trust notes. On July 6, 1923, the trustee, Frank Reed, issued a check to E. P. Crain, treasurer, on the Bismarck bank, for the sum of $ 6,993.40. This amount was deposited by the treasurer in the Merchants State Bank of Glen Ullin to the credit of the Spring Valley Products Company. On July 11, 1923, the Bismarck bank, in which the money was to be deposited and kept in escrow until the amount of $ 30,000 was realized, reported that up to that period no additional cash had been deposited therein. On July 12, 1923, the secretary of the Spring Valley Products Company reported the total sum of $ 11,093.40 cash realized. He testified, however, that the amount represented by the trustee's check of July 6th, was the only amount that was turned over to him on the sale of the trust notes. The secretary accounts for the difference between $ 6993.40 and $ 11,093.40 by the fact that A. F. Gumphrey sold trust notes and deposited the money in the Merchants State Bank of Glen Ullin, to the credit of the Spring Valley Products Company.
The necessary amount of money to keep the mine going and to pay pressing obligations was not forthcoming. A...
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