Love Manufacturing Co. v. Queen City Manufacturing Co.

• Decision Date: 18 May 1896
• Citation: 74 Miss. 290,20 So. 146
• Court: Mississippi Supreme Court
• Parties: LOVE MANUFACTURING CO. ET AL. v. QUEEN CITY MANUFACTURING CO. ET AL

20 So. 146

74 Miss. 290

LOVE MANUFACTURING CO. ET AL. v. QUEEN CITY MANUFACTURING CO. ET AL

Supreme Court of Mississippi

May 18, 1896

October 1896

FROM the chancery court of Lauderdale county HON. W. T. HOUSTON Chancellor.

The Queen City Manufacturing Company, an insolvent corporation executed a general assignment, by which it preferred debts due to several of the directors who were stockholders, and it also preferred debts for which two of the directors who were stockholders were bound as indorsers. The directors who were beneficiaries of the preferences voted for and caused the assignment to be made. They constituted a majority of the board, and these same persons controlled and voted more than half the stock in the stockholders' meeting which ordered the assignment made. The assignee having filed his petition under chapter 8 of the code of 1892, in the chancery court, the Love Manufacturing Company and others, creditors of the assignor, filed their cross petition assailing the assignment as fraudulent. This pleading presented the only question decided by the court. A demurrer thereto was sustained by the court below, and the cross petitioners appealed.

Decree reversed and cause remanded.

Miller & Baskin, for appellants.

We submit that when an insolvent corporation undertakes to make a general assignment by which it conveys all of its property to an assignee, and thereby suspends its business, or ceases to exercise its functions as a corporation, becoming practically dead, it cannot prefer its directors and officers, and that any such attempt would be violative of all the rules of law applicable to the same. It is a nullity, and cannot be enforced. The reasons which condemn this assignment are various, some courts holding, in substance, that the fund of an insolvent corporation is a trust fund for the benefit of the general creditors of the corporation, and should therefore, be distributed, especially in a court of equity, ratably amongst all of said creditors; other courts hold that such an assignment cannot stand, because the directors of the corporation occupy a fiduciary relation to the creditors of the corporation, and cannot obtain a preference in their behalf in dealing with the property managed and controlled by them as such fiduciaries; still other courts hold that it might be conceded that the funds of the insolvent corporation are not a trust fund in favor of the general creditors without any specific lien thereon, still, to uphold such an assignment would be violative of public policy, because of the relation of the directors to the general creditors and to the insolvent corporation. The necessity of this limitation upon the right to give preferences among creditors when asserted by corporations may not have been perceived in earlier times; but the growing importance and variety of modern corporations and interests, we submit, should compel its recognition and adoption. It is immaterial that this assignment was made by authority of the stockholders, because, in this particular instance, the directors were also practically all the stockholders, and the directors procured the same to be made for the manifest purpose of being benefited themselves.

The preference to W. F. Brown for his eight hundred and sixty-five dollars, the preference to B. F. Ormond for four hundred and eighteen dollars, and the preference to Brown and Weems as indorsers on the paper of the corporation, the assigner herein, stamp the assignment as fraudulent and void per se. Consolidated Tank Line Co. et al. v. Kansas City Varnish Co. et al., 45 F. 7, and authorities cited therein; Corey et al. v. Wadsworth (opinion of the supreme court of Alabama, rendered June 14, 1892), 11 Southern Reporter, 350; 2 Morawetz on Private Corporations, 350; Haywood et al. v. Lincoln Lumber Co. et als., 64 Wis., 639; Howe, Brown & Co. et al. v. Sanford Fork and Tool Co. et al., 44 F. 231; Marr v. Bank, 4 Cold., 476; Hopkins' Appeal, 90 Pa. State Rep., 76; Ingwersen et al. v. Edgecombe et al., 60 N.W. 1032; Wait on Insolvent Corporations, sec. 162; Olney v. Land Co., 16 Rhode Island, 597 (18 Atlantic Reporter, 181).

The sole question decided by our court in the case of Arthur v. Commercial Bank, 9 Smed. & M., 394, so far as it touches the present controversy, is that an insolvent corporation could make a preferential assignment. There is no pretense that Arthur v. The Commercial Bank announced that an insolvent corporation could make a preferential assignment, the preferences therein given being to the directors and officers of said insolvent corporation. No question of that kind was raised in that case. The real question in this case, as we understand it, now submitted to this court, viz., whether or not an insolvent corporation can make a general assignment, preferring the directors and officers of said corporation in said assignment, is res integra in our state, and we think that this court, in view of its off-repeated declarations in reference to assignments, will follow the great majority of the highest courts of the states of this union in declaring that the directors and officers of a corporation will not be permitted to absorb the assets of the corporation and exclude all creditors from participating in said assets.

We respectfully call the attention of the court to the very able opinion delivered by Justice Harlan of the United States supreme court, while sitting with Jenkins, circuit judge, and Bunn, district judge of the circuit court of appeals of the seventh circuit. The opinion was rendered on the first day of October, 1894, in the case of Sutton Mfg. Co. v. Hutchinson, as reported in 63 Federal Reporter, page 496. This opinion of Justice Harlan is not only an elaborate one, but presents, as we from our reading conclude, all the authorities both for and against the proposition involved in this case. We do not see how to escape the conclusion that the law is against the appellee in this case.

Brame & Alexander, on same side.

We do not rest our contention that the assignment in this case is void on the ground that there was any trust in the usual sense in which this word is understood. The leading cases relied on by us do not rest their decisions on the ground of a trust, but rather on the ground of agency, and we do not, therefore, ask the court to overrule or in any way modify its previous decisions. What we contend for is, that four out of five directors of an embarrassed corporation cannot, in an effort to secure a preference for themselves as against other creditors, postpone such creditors, and, by their own votes, execute a general voluntary assignment to one of such voting directors, giving preferences to the other three. It is a settled and universal doctrine in the law of corporations that directors cannot vote upon questions affecting their private interests. See 1 Morawetz on Priv. Corp., sec. 517; 1 Beach on Priv. Corp., sec. 276; 1 Spelling on Priv. Corp., sec. 433; 3 Thompson Com. on Corp., sec. 4042; Wardell v. Railroad Co., 103 U.S. 651; Smith v. Los Angeles, etc., Ass'n, 78 Cal. 289.

The courts everywhere are distinguishing between the right of directors of "going concerns, " as they are called, and concerns which liquidate their own business by acts of insolvency. This distinction is not a new one in our own state's jurisprudence. It has been recognized and applied in the law governing assignments by partnerships, and even, to some extent, to assignments by individuals. We are not so uncandid as to say that oftentimes it is not equitably right for corporations to pay back advances made by its officers in extremities before paying other creditors, but the danger, the evils, the hardships, the fraud that lurks in the doctrine that directors and officers can prolong the life of an insolvent corporation at their pleasure and terminate it at their will, and, in the act of doing so, by their own votes reserve for their own debts the assets of the concern, are enough to cause the court to hesitate long before it will sanction such a doctrine.

The assignment is void under the authorities, and there is no decision of this court which requires that it should be upheld. Every recent text-book on corporations which treats of this subject, lays down the rule that an insolvent corporation cannot, by a general assignment, prefer its own directors. By far the greater number of states hold to the same doctrine. Indeed, it is hardly supposable that all the text writers (Morawetz, Beach, Cook, and others) should agree in stating the rule to be this unless they were supported in it by the number and weight of the decisions. Hill v. Pioneer Lumber Co., 113 N. C., 173; Roseboom v. Warner, 23 N.E. 339 (Ill.); Bradley v. Farwell, 1 Holmes, 433; Little Rock R. R. Co. v. Page, 35 Ark., 304; Lyons-Thomas Hardware Co. v. Perry Stove Co., 27 S.W. 100; Harrigan v. Quay, 26 Ib., 897; Ford v. Plankinton Bank, 58 N.W. 766; Swepson v. Bank, 9 Lea, 713; 17 Am. & Eng. Enc. L., 122; also, the English case of the Gaslight Co. v. Terrell, L. R., 10 Eq., 168; Atwater v. Am. Bank, 40 Ill. App. , 501; Hill v. Knickerbocker Electric Light Co., 63 Hun, 632; Sicardi v. Keystone Oil Co., 24 At. R., 163.

By a general assignment which does not prefer the directors, the corporations acts through its proper authorities, on the one side, and its creditors, as such, stand on the other side. It is doing what the law would do for it. But when the directors are themselves creditors, and, as directors, assign to themselves as creditors, we have the same persons acting as buyers and sellers, and it is hard to conceive of an argument in favor of tolerating a preference of a director in such case. The evil can hardly be illustrated better than in the history of this case....