Lowry Banking Co. v. Empire Lumber Co.
| Decision Date | 02 May 1893 |
| Citation | 17 S.E. 968,91 Ga. 624 |
| Parties | LOWRY BANKING CO. et al. v. EMPIRE LUMBER CO. et al. |
| Court | Georgia Supreme Court |
Syllabus by the Court.
1. As it is the duty of the directors of a corporation to be informed of its condition with reference to solvency or insolvency, they are to be treated as having that knowledge when a mortgage upon its assets is executed with their assent or by their authority.
2. On principles of general law the directors of an insolvent corporation cannot, to the prejudice of any of its creditors indemnify, by mortgage upon its assets, one or more of their own body against loss by reason of his or their suretyship for the corporation upon liabilities already incurred, such indemnity not being made in the execution or performance of any agreement or undertaking entered into at or prior to the time when the liabilities were incurred. Nor can they, in a like case, indemnify a cosurety of one or more of the directors, in as much as the indemnity of one surety inures by operation of law, to the benefit of the others.
3. In the present case the mortgages under consideration are not only tainted with self- interest on the part of some of the directors, but no authority to execute them was conferred upon the president and secretary by any corporate act of the board of directors, done and recorded as the statute under which the corporation was created expressly prescribes. If one of these infirmities alone would not render the mortgages void, certainly the two together have that effect.
4. The mortgages being void as between the immediate parties thereto, no trust was raised by them in behalf of the creditors of the corporation to whom the sureties sought to be indemnified were bound. Nor can the creditors take anything by subrogation, there being no right acquired by the sureties to be subrogated to.
5. There is no presumption of law that bonds held by a creditor as collateral security are worth their face value. In marshaling the assets of an insolvent debtor, such bonds should be estimated at their true value only, and the creditor should be allowed to prorate with unsecured creditors upon at least the balance of his claim.
6. In the light of all the circumstances, there was sufficient evidence to warrant the report of the master that the corporation was insolvent when the mortgages were executed. Whether that insolvency was actually known, or not, to the mortgagees, is immaterial.
7. Where, in the administration of the assets of an insolvent corporation, intervening creditors claim as mortgagees, or as subrogated to the alleged rights of mortgagees, and it appears in evidence that they are creditors, but unsecured by the alleged mortgages, the master, on such a reference as that made in the present case, should report the amounts due them, respectively, so as to enable them to have rendered by the court, in their favor, the requisite judgments or decree to admit them to participate in the fund, if any, which may be for distribution among creditors of their class. This should be done whether there be in their pleadings any express prayer for recognition as unsecured creditors or not. If one or more of them have judgments previously obtained in a court of this state, and the judgments are in evidence, the amounts and dates of the same should be reported as proved.
Error from superior court, Dodge county: D. M. Roberts, Judge.
Action by the Lowry Banking Company and others against the Empire Lumber Company and others. From a judgment for defendants plaintiffs bring error. Reversed in part, and affirmed in part.
R. J. McCamy, P. L. Mynatt & Son, and N. J. Hammond, for plaintiffs in error.
J. F. De Lacy,
p>Page Claud Estes, Hill, Harris & Birch, and John L. Hopkins & Son, for defendants in error.
1. A corporation can do nothing, except through the individuals who are charged with the management and control of its affairs. In the very nature of things, the directors are, of all persons, those who ought to be aware of everything material to a proper discharge by the corporation of its duties and obligations. To permit ignorance in these officials of its affairs would certainly be going to the extreme limit of legal indulgence. Surely, they ought to know its condition with reference to solvency or insolvency. This duty is imperative, and therefore, for all purposes, they are to be dealt with and treated as having absolute knowledge of what the corporation owns and what it owes, whenever a mortgage upon its property is executed with their consent, or by their authority. To state this proposition is to argue it, and we have no doubt it will be accepted as correct without question.
2, 3. It was insisted that the Empire Lumber Company, under its charter, had no authority to make a mortgage at all, except for the direct purpose of securing the payment of money borrowed by it in the due course of business. In the view we take of the law controlling this branch of the case, it will be unnecessary to discuss or decide this precise question. For our purposes it may be assumed that this corporation had the general power to execute mortgages, and could make a mortgage to indemnity an indorser or surety on an indebtedness already accrued, and, though insolvent, could thus prefer such surety or indorser, provided the mortgage was authorized by proper corporate action, executed with due regularity, and did not directly or indirectly operate for the benefit of a director or directors of the corporation. An interesting case bearing upon the general power of a corporation to make mortgages is that of Jones v. Guaranty, etc., Co., 101 U.S. 622. In Pyles v. Furniture Co., (W. Va.) 2 S.E. 909, it was held that an insolvent corporation, having ceased its business, had the same power as an insolvent individual to prefer a creditor in a general assignment of all its property for the payment of its debts. We do not, however, deem it necessary to pursue further this branch of the question under consideration.
The general statute of Tennessee under which this corporation was created and organized expressly requires that the board of directors shall keep a full and true record of all their proceedings. It does not appear from the record in the present case that any authority to execute the mortgages in question was ever conferred upon the president and secretary of the company by any corporate act on the part of the directors. The minutes of the corporation, so far as we are informed, do not show that any action was taken, authorizing the execution of these mortgages. It is perhaps true that their execution was authorized by the unanimous consent of all the real stockholders and directors, but this consent is not evidenced in the manner prescribed by the law of Tennessee, or the charter obtained in pursuance thereof. If these mortgages had no other infirmity than that arising from the failure of the directors to comply with the provisions of the charter, and the law applicable thereto, we are not prepared to say the mortgages, for this reason alone, would be invalid and void. As to whether or not they ought for this reason to be set aside, much could be said on both sides. Granting, however, for the sake of the argument, that the mortgages, by reason of the fact that they were made with the consent of the directors and stockholders, would be good, if executed in favor of persons in no way connected with the corporation, although such consent was not given in the manner prescribed by law, and not properly entered upon the minutes of the corporation, the main question at last is, can the mortgages of an insolvent corporation, executed for the benefit of its own directors, be good as against creditors of the corporation? Before entering upon a discussion of this question, it will perhaps be proper to remark that in our opinion the record clearly shows that the corporation was insolvent when the mortgages were given, and, as already seen, the directors were unquestionably chargeable with full knowledge of this fact. The mortgage to Heath was made September 23, 1890, and the mortgage to R. A. Anderson was made the 1st day of October, 1890. The indebtedness of the corporation about that time was not less than $500,000, none of which has been paid, and the record contains no hint of any assets other than those covered by the mortgages. Nall who was the bookkeeper, testified that the failure occurred October 11, 1890. The original bill in this case was filed on that day. The lumber company virtually admits its insolvency at the time the bill was filed, and, this being true, it...
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