Louisville Banking Co. v. Etheridge Mfg. Co.

• Decision Date: 22 October 1897
• Citation: 43 S.W. 169
• Parties: LOUISVILLE BANKING CO. v. ETHERIDGE MANUF'G CO. et al. RILEY v. MERCHANTS' NAT. BANK et al. BROWN et al. v. RILEY et al.
• Court: Kentucky Court of Appeals

43 S.W. 169

LOUISVILLE BANKING CO. v. ETHERIDGE MANUF'G CO. et al.

RILEY v. MERCHANTS' NAT. BANK et al.

BROWN et al. v. RILEY et al.

Court of Appeals of Kentucky.

October 22, 1897

Appeal from circuit court, Jefferson county.

"Not to be officially reported."

Consolidated actions by J. H. Riley and others against the Etheridge Manufacturing Company and others to set aside an assignment for the benefit of creditors, and by George Straeffer, Jr. to settle the assigned estate. Judgment setting aside the assignment, and giving priority to certain attaching creditors, and the Louisville Banking Company and others appeal. Certain judgments and orders reversed, and others affirmed.

GUFFY J.

The Etheridge Manufacturing Company, a corporation, made an assignment December 17, 1890, to George Straeffer, Jr., as alleged, for the benefit of all its creditors. On the 18th of August, 1891, J. H. Riley instituted suit against said corporation and the assignee and the stockholders individually, seeking to make them liable for his debt sued on, and also set up the fact of the assignment, and asked for a settlement of the same; charging negligence, etc., on the part of the assignee. The allegations setting up the assignment were finally withdrawn by Riley. It was also held that the stockholders were not individually liable for his debt.

It also appears that the assignee, at first, by cross action, sought to obtain a settlement of the estate, but finally withdrew same, and on November 6, 1891, instituted suit No. 45,001 for a settlement of the assigned estate. It also appears that J. S. Callaway, the Merchants' National Bank, J. M Robinson & Co., the Citizens' National Bank, and the Louisville Banking Company each filed separate suits against the said corporation; the assignee being made a party to part, if not to all, of the said suits. The above-named suits, together with that of J. H. Riley and the suit (No. 45,001) by the assignee for a settlement of the estate, were all consolidated and heard together. The creditors attacked the assignment, and sought to have it set aside, for the reason that the same was fraudulent, and made with the intent to hinder, delay, and defraud creditors; and all of said creditors sued out attachments for their several debts, which were executed on the said assignee; and he was also summoned as garnishee. N. N. Etheridge, one of the stockholders of said corporation, asserted a mortgage lien upon the proceeds in the hands of said assignee for the sum of $6,000, besides interest; his claim being based upon an unrecorded mortgage given upon part of the assigned estate, and dated October 6, 1889. The court, upon final hearing, adjudged the assignment to have been fraudulently made, and set the same aside, and held it for naught. From that judgment, Brown, De Turck & Co., etc., have appealed. On the question of priority of attachments, the court adjudged that J. H. Riley is entitled to the first lien on the attached funds, to the extent of only his costs, not exceeding $30; that J. S. Callaway is entitled to the second attachment lien for his debt; the Merchants' National Bank, to the third attachment lien; J. M. Robinson, to the fourth attachment lien; Citizens' National Bank, to the fifth attachment lien; and the Louisville Banking Company, to the sixth attachment lien,-to the extent of the amount adjudged each of them. The judgment allowing N. N. Etheridge's claim of $6,000 was resisted by the attaching creditors, and is also before us for revision.

The testimony in this case fully sustains the judgment of the court in setting aside the assignment, and holding same for naught. We cannot assent to the contention that a corporation cannot have a fraudulent intent. The acts of those authorized to act for a corporation are, in fact and in law, the acts of the corporation, and it must be held to intend that which the acts indicate.

It is, however, the contention of the assignee, as well as of Brown, De Turck & Co., that, the corporation being insolvent, its assets, as a matter of law, must be distributed pro rata among its creditors; and numerous authorities are cited to sustain their contention. It may be true that some courts have so held, and that others have used expressions, in the discussion of cases before them, from which it might be inferred that the courts were so holding. In some of the states, we apprehend, there are statutes which make stockholders or directors trustees for the benefit of the creditors; but we are of the opinion that the weight of authority, as well as the reason of the law, places the property of a corporation upon the same footing as that of an individual, so far as the rights or priorities of creditors are concerned. In Hollins v. Iron Co. (decided in 1893) 150 U.S. 371, 14 S.Ct. 127, the court, in a well-considered opinion, seems to hold that the property of a corporation, so far as creditors' rights are concerned, is to be distributed or disposed of in the same manner as that of a natural person. We quote as follows from the opinion in Hollins v. Iron Co.:

"While it is true that language has been frequently used to the effect that the assets of a corporation are a trust fund held by a corporation for the benefit of creditors, this has not been to convey the idea that there is a direct and express trust attached to the property. As said in 2 Pom. Eq. Jur. par. 1046, they 'are not, in any true and complete sense, trusts, and can only be called so by way of analogy or metaphor.' To the same effect are decisions of this court. The case of Graham v. Railroad Co., 102 U.S. 148, was an action by a subsequent creditor to subject certain property, alleged to have been wrongfully conveyed by the corporation debtor, to the satisfaction of his judgment. And the very proposition here presented was then considered, and in respect to it the court, by Mr. Justice Bradley, said (page 160):

"'It is contended, however, by the appellant, that a corporation debtor does not stand on the same footing as an individual debtor; that, whilst the latter has supreme dominion over his own property, a corporation is a mere trustee, holding its property for the benefit of its stockholders and creditors; and that if it fall to pursue its rights against third persons, whether arising out of fraud or otherwise, it is a breach of trust, and creditors may come into equity to compel an enforcement of the corporate duty. This, as we understand, is the substance of the position taken. We do not concur in this view. It is at war with the notions which we derive from the English law with regard to the nature of corporate bodies. A corporation is a distinct entity. Its affairs are necessarily managed by officers and agents, it is true; but, in law, it is as distinct a being as an individual is, and is entitled to hold property (if not contrary to its charter) as absolutely as an individual can hold it. Its estate is the same, its interest is the same, its possession is the same. Its stockholders may call the officers to account, and may prevent any malversation of funds or fraudulent disposal of property on their part. But that is done in the exercise of their corporate interests, but coincident with them.

"'When a corporation becomes insolvent, it is so far civilly dead that its property may be administered as a trust fund for the benefit of its stockholders and creditors. A court of equity, at the instance of the proper parties, will then make those funds trust funds, which, in other circumstances, are as much the absolute property of the corporation as any man's property is his.'

"With reference to the suggestion in the last paragraph, it may be observed that the court does not attempt to determine who are proper parties to maintain a suit for the administration of the assets of an insolvent corporation. All that it decides is that, when a court of equity does take into its possession the assets of an insolvent corporation, it will administer them on the theory that they, in equity, belong to the creditors and stockholders, rather than to the corporation itself. In other words (and that is the idea which underlies all these expressions in reference to 'trust' in connection with the property of a corporation), the corporation is an entity distinct from its stockholders as from its creditors. Solvent, it holds its property as an individual holds his,-free from the touch of a creditor who has acquired no lien; free, also, from the touch of a stockholder who, though equitably interested in, has no legal right to, the property. Becoming insolvent, the equitable interest of the stockholders in the property, together with their conditional liability to the creditors, places the property in the condition of a trust, first for the creditors, and then for the stockholders. Whatever of trust there is arises from the peculiar and diverse equitable rights of the stockholders, as against the corporation, in its property, and their conditional liability to its creditors. It is rather a trust in the administration of the assets after possession by a court of equity, than a trust attaching to the property, as such, for the direct benefit of either creditor or stockholder. Again, in the case of Railway Co. v. Ham, 114 U.S. 587, 5 S.Ct. 1081, it appeared that four railway corporations, owing debts, were consolidated under authority of law, and by the terms of the consolidation agreement the new corporation was to protect the debts of the old. Subsequently the new corporation executed a mortgage on all its property, and in a contest between the mortgagees and the unsecured creditors of one of the constituent companies the court held that the lien of the mortgagees was prior. In respect to this, Mr. Justice Gray...