McIver v. Young Hardware Co.
| Decision Date | 30 April 1907 |
| Citation | 57 S.E. 169,144 N.C. 478 |
| Parties | McIVER v. YOUNG HARDWARE CO. |
| Court | North Carolina Supreme Court |
Appeal from Superior Court, Moore County; Justice, Judge.
Action by D. E. McIver, receiver of the Sanford Hardware Company against the Young Hardware Company. From a judgment for plaintiff for less than the relief demanded, he appeals. Reversed.
Where the directors of a corporation wrongfully transferred all its assets to defendant company, in exchange for the latter's stock, which they divided among themselves, to the prejudice of creditors, and defendant company thereafter became insolvent, the receiver of the company whose assets were sold was entitled to prove his claim against defendant company for the full value of the assets so conveyed, though he could not recover as his pro rata share of defendant's assets more than would be sufficient to pay the debts of the selling company, with interest, costs, and expenses.
The Sanford Hardware Company is a corporation chartered by this state in June, 1900, with an authorized capital of $4,500, of which $3,000 has been paid in, and had its place of business at Sanford, N.C. The Young Hardware Company was also chartered by this state, and had its place of business at Raleigh, N. C., both having been engaged in the hardware business. The Sanford corporation became insolvent, and, in a judgment creditors' suit against it to subject its assets to the payment of its debts and liabilities, the plaintiff D. E. McIver, was appointed receiver, and, as such, he brings this action. The case was tried by consent without a jury and the court found substantially the folowing facts: The plaintiff, D. E. McIver, was duly appointed in April, 1905, receiver of the Sanford Hardware Company, with the usual powers. The defendants, Bynum and Clark, were the president and secretary and treasurer of the company, and they, with Terry, were its only stockholders and directors. Terry, Bynum, and Clark, finding that the company was not making money, sold to the Young Hardware Company the entire stock of goods of the Sanford Hardware Company at the price of $2,000, its then value, taking in payment therefor capital stock of the former company of the par value of $2,000, which was worth at the time 50 cents on the dollar, as they then well knew, and which is now absolutely worthless. Of this stock, according to the agreement between the parties, $500 was issued directly to Terry, $500 to Bynum, and $500 to Clark. The remaining $500 was retained by the Young Hardware Company until the Sanford Hardware Company's debts should be paid, and has never been issued and delivered to the latter. It was thought, at the time, to be sufficient to pay the outstanding debts. The several defendants, after the appointment of McIver as receiver, and after the stock became worthless, tendered the stock of the Young Hardware Company, severally held by them, to the plaintiff, who declined to receive it. The debts of the Sanford Hardware Company, at the time of the transactions herein mentioned and at the present time, amount to about $620. Some of its debts, not included in the $620, have been settled by it since the transfer of its stock of merchandise. The Sanford Hardware Company retained a safe and typewriter, value not given, and some small articles and certain book accounts now worth $10 or $15, which articles with the stock of goods constituted its entire assets. Creditors have reduced their claims to judgment, have issued executions, and the sheriff has returned the same "nothing to be found." All of the foregoing facts were known to all of the defendants at the time of the transaction. The Young Hardware Company is now insolvent, and was so when this action was brought. The Sanford Hardware Company has never received from it, or from any source, any payment of money or other thing of value for the stock of goods delivered to the latter by Bynum, Clark, and Terry. At the time of the said transactions, Bynum was president of the Sanford Hardware Company and manager of the other corporation, but had no other interest in the latter until the $500 of its stock was issued to him. The negotiations and trade with the Young Hardware Company were conducted by Bynum and Clark, by and with the knowledge and consent of Terry. When the offer was made for the stock of goods by the Young Hardware Company, Bynum, Clark, and Terry consulted about it, and accepted in writing the proposal to buy. At the time, though, the Sanford Hardware Company was not being pressed in any way by its creditors, and had not been. The transfer of the goods was made in November, 1904, in good faith, without concealment or fraud, and Bynum, Clark, and Terry received nothing in the way of benefit from the transaction, except the stock of the Young Hardware Company. The charter of the Sanford Hardware Company provides as follows: The company also had the general power to buy and sell real and personal property. Upon the facts thus found by it, the court adjudged that the plaintiff is only entitled to recover from the defendants, A. P. Terry, A. J. Bynum, Jr., and A. M. Clark, the certificates of stock held by them and issued to them by the Young Hardware Company; that he take nothing by his suit, except the said certificates of stock; and that the defendants go without day and recover of the plaintiff their costs. Plaintiff excepted and appealed.
John W. Hinsdale and Seawell & McIver, for appellant.
W. J. Adams and Womack, Hayes & Bynum, for appellees.
WALKER J. (after stating the case).
If we should concede that the transaction by which the transfer of the property of the Sanford Hardware Company to the Young Hardware Company was effected by Bynum, Clark, and Terry was valid as a corporate act and sufficient to pass the title to the latter company, as against creditors of the former company, unless there is some other objection to the transfer, we think it is so lacking in the essential elements of a bona fide sale that, however regularly and formally those who were, at the time, stockholders and officers of the Sanford Hardware Company proceeded, no title to the property was ever acquired by the Young Hardware Company, so far as the creditors of the other corporation are concerned. The essence of a sale is the transfer of the property in the thing from the buyer to the seller for a price. Tiffany on Sales, pp. 1, 2. No price has been paid to the Sanford Hardware Company which is an entity distinct from its corporators. It was not competent for the directors of the Sanford Hardware Company, even though they were also stockholders, to sell its property to any one for their own benefit and advantage and to the prejudice of its creditors, or, in other words, to sell practically the entire property of the corporation upon a consideration moving to themselves. It has been held that a director, who is also a creditor of a corporation, cannot prefer himself to the other creditors in the application of its assets to the security or payment of its debts. Hill v. Lumber Co., 113 N.C. 173, 18 S.E. 107, 21 L. R. A. 560, 37 Am. St. Rep. 621; Bank v. Cotton Mills, 115 N.C. 507, 20 S.E. 765. The assets of a corporation are, in a certain sense, to be regarded as a trust fund, and the officers as occupying the position of fiduciaries, in respect to their duty towards creditors, charged with the preservation and proper distribution of those assets. The corporate debts must be paid before they can appropriate any part of the assets to their own use, though they may also be stockholders. The fund for the payment of dividends and for the redemption of the stock is what is left after the creditors have been satisfied. It is true that, subject to the exception already mentioned, the corporation, through its appointed officers and agents, may dispose of its assets just as an individual may deal with his property, until, by reason of its insolvency, they are brought under the control of the court, when they will be distributed among the creditors ratably and upon the principle that equality is equity, subject, however, to the recognition and enforcement of any superior equitable rights or liens acquired beforehand, and which may entitle the holders thereof to be preferred with respect to them in the administration of the fund.
It is needless to enter upon any elaborate discussion of what is known as the ""trust fund doctrine," in order to define its true nature and to fix its limitations, for it is quite sufficient, for the purpose of deciding this case that, as a part of that important doctrine, we find it to be settled that the stockholders and officers of the corporation are liable to it and to its creditors for any acts of malfeasance, misfeasance, or nonfeasance by which their rights are injuriously affected, and, as a consequence, for any loss arising out of their fraud or negligence. If they have served themselves directly or indirectly, instead of serving the corporation, when their interests and those of the corporation or of its creditors conflict, they must answer for any loss resulting from their faithlessness and cupidity. While there is no direct and express trust attached to the corporate property for the benefit of its creditors, so that its assets cannot be conveyed by it or acquired by another, except they be...
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