Luedecke v. Des Moines Cabinet Co.
| Decision Date | 20 November 1908 |
| Parties | CARL LUEDECKE, Appellee, v. THE DES MOINES CABINET CO., THE WELLS & ANTES UNDERTAKING CO., and F. L. HARTUNG, Appellants |
| Court | Iowa Supreme Court |
Appeal from Polk District Court.--HON. ALFRED H. MCVEY, Judge.
THIS is a proceeding whereby plaintiff, a judgment creditor of a corporation known as the "Des Moines Cabinet Company," seeks to recover the amount thereof from the Wells & Antes Undertaking Company, and to establish a lien to the amount thereof against certain property conveyed by the cabinet company to the undertaking company. The trial court granted the relief prayed, and the defendants Wells & Antes Company and Des Moines Cabinet Company appeal.--Modified and affirmed.
Modified and affirmed.
J. D Wallingford and Clinton L. Nourse, for appellants.
George Wambach, for appellee.
Plaintiff recovered judgment against the Des Moines Cabinet Company December 31, 1900, in the sum of $ 325 for breach of a contract of employment. The cabinet company was a corporation organized under the laws of this State, and at all times material to our inquiry the entire stock of the corporation was owned by defendant Hartung. On the 15th day of August, 1900, and after plaintiff had commenced his suit against the cabinet company, Hartung, as president of that company, sold and transferred to the Wells & Antes Undertaking Company, also an Iowa corporation, all the assets of the cabinet company, the consideration named being $ 3,500. Instead of cash Hartung individually received thirty-five shares of the stock of the undertaking company which he immediately hypothecated for his private account. Plaintiff, after obtaining his judgment, caused execution to issue against the cabinet company, which was returned no property found. He thereupon brought this suit in equity alleging that when the undertaking company purchased the property, it knew of plaintiff's claim, and with intent to hinder, delay and defraud him it took possession of all the assets of the cabinet company, and converted the same to its own use without other consideration than the issuance of its own stock in payment therefor; that by reason of the transfer the undertaking company became possessed of all of the assets of the cabinet company, leaving nothing for the payment of its debts.
Upon the trial plaintiff withdrew all charges of fraud and deceit, "except such fraud as may arise from the transaction between the parties at law." As we understand it, plaintiff relies upon a single proposition in this case, and this is that, where one corporation transfers all its assets to another corporation, and thus practically ceases to exist without having paid its debts, the purchasing corporation takes the property subject to an equitable lien or charge in favor of the creditors of the selling corporation, and this without reference to the question of actual fraud. If the affirmative of this proposition be held, it must be upon the theory that the assets of a corporation are in the nature of a trust fund for the payment of its debts, and that a sale of the entire property works a dissolution of the selling corporation, and justifies an accounting at the suit of creditors. Plaintiff also claims that under the facts disclosed by this record he became entitled to a judgment against the undertaking company and its successor in interest for the amount of the judgment he obtained against the cabinet company. The trial court was evidently of this opinion, for it rendered judgment against all the defendants personally, and also established a lien to the amount of the judgment against the property of the cabinet company sold by Hartung to the undertaking company, and directed its sale under special execution. Appellants challenge that part of the decree rendering personal judgment against the undertaking company, the successor to the assets of the cabinet company, and we are constrained to sustain them in this position. In order to render the purchasing company personally liable for the debts of the selling corporation, it must appear that (a) there be an agreement to assume such debts; (b) the circumstances surrounding the transaction must warrant a finding that there was a consolidation of the two corporations; or (c) that the purchasing corporation was a mere continuation of the selling corporation; or (d) that the transaction was fraudulent in fact. Baker v. Hall, 76 Neb. 88 (107 N.W. 117, 111 N.W. 130, 113 N.W. 267); Sharples v. Harding (Neb.), 78 Neb. 795, 111 N.W. 783 (11 L. R. A. (N. S.) 863); Allen v. Church, 138 Mich. 541 (102 N.W. 808); Chase v. Telephone Co., 121 Mich. 631 (80 N.W. 717); Ewing v. Composite Co., 169 Mass. 72 (47 N.E. 241), and other like cases. None of these things appear in this case, and in our opinion the court was in error in rendering a personal judgment against the purchasing corporation.
Little is said specifically of that part of the decree which establishes plaintiff's judgment against the cabinet company as a lien upon the property purchased by the undertaking company, although we assume that appellants' counsel are adopting the same theories with reference thereto that they urge against the personal judgment. The cases they cite do not go to this extent, however, although there are some which sustain the proposition that the purchasing corporation takes the property free from all debts or claims against the selling one. A great many authorities in this country hold to the doctrine that, if one corporation transfers all its assets to another, and thus practically ceases to exist without having paid its debts, the purchasing corporation takes the property subject to an equitable lien or charge in favor of the creditors of the selling corporation. Some courts announce a modified doctrine declaring that the principle has no application to a sale made in the usual course of business, nor to a bona fide sale for a full consideration in cash or its equivalent. Although announcing in general terms the first proposition, we are probably committed to the modified one in Warfield v. Marshall Canning Co., 72 Iowa 666, 34 N.W. 467. It has been broadly asserted by courts of the highest standing that the capital stock of a corporation is a fund for the payment of its debts. Upton v. Tribilcock, 91 U.S. 45 (23 L.Ed. 203). This modern or so-called American doctrine has never been recognized in England, nor does it exist at common law; and, while at one time quite generally adopted in this country, it is now believed to be unsupported to its full extent by any considerable number of courts. Indeed the court which first announced it has largely receded from its former position, and now says that no trust in its true sense exists; that all that was intended by the previous expressions was to announce the existence of an equitable right, which will be enforced whenever a court of equity, at the instance of a proper party, has taken possession of its assets. "It is never understood that there is a specific lien or a direct trust." See Hollins v. Iron Co., 150 U.S. 371 (14 S.Ct. 127, 37 L.Ed. 1113). We have recently gone over this matter in the case of State Trust Co. v. Turner, 111 Iowa 664, 82 N.W. 1029, and have repudiated the trust-fund doctrine as broadly announced in some of the earlier cases in this country. The creditors of a corporation in a proper case have an equitable right or lien upon the assets of a corporation. But a corporation, like a partnership, may transfer its property in good faith to a bona fide purchaser, and such purchaser will hold it free from the debts of the corporation.
The statutes of this State, however, prohibit the diversion of corporate funds to other objects than those mentioned in its articles (Code, section 1621), and it is a well-settled rule of the common law that the stockholders of a corporation can not divide its property or assets among themselves without first paying the corporate debts. The rules thus announced have been stated very clearly in McIver v. Young Hardware Co., 144 N.C. 478 (57 S.E. 169, 119 Am. St. Rep. 970); O'Bear Jewelry Co. v. Volfer, 106 Ala. 205 (17 So. 525, 28 L. R. A. 707, 54 Am. St. Rep. 31); Hospes v. Car Co., 48 Minn. 174 (50 N.W. 1117, 15 L. R. A. 470, 31 Am. St. Rep. 637); Cole v. Mercantile Trust Co., 133 N.Y. 164 ...
To continue reading
Request your trial