Merchants' Nat. Bank v. Newton Cotton Mills

• Decision Date: 27 December 1894
• Citation: 20 S.E. 765,115 N.C. 507
• Parties: MERCHANTS' NAT. BANK OF RICHMOND et al. v. NEWTON COTTON MILLS.
• Court: North Carolina Supreme Court

20 S.E. 765

115 N.C. 507

MERCHANTS' NAT. BANK OF RICHMOND et al. v. NEWTON COTTON MILLS.

Supreme Court of North Carolina

December 27, 1894

Appeal from superior court, Catawba county; Bynum, Judge.

Action by the Merchants' National Bank of Richmond, Va., and others, against the Newton Cotton Mills, for the appointment of a receiver, etc. From a decree sustaining exceptions by the Potter & Atherton Machine Company to the report of the referee, the bank and others appeal. Modified.

Irregularities in a judgment by confession, which do not make it void, may be amended.

Jones & Tillett and L. L. Witherspoon, for appellants.

Walker & Cansler and W. P. Bynum, Jr., for appellees Potter Mach Co. and Mitchell & Co.

MacRAE J.

Let us examine first the case presented by the appeal as to the right of an insolvent corporation to make a preference. It is contended with great learning and research by the counsel for the appellees that, when a corporation becomes insolvent, it is thenceforward unlawful for its directors to make any preference in the payment of its debts, but that all its property must be kept and administered for the common benefit of all its creditors, in the same manner as if the receiver had taken charge thereof, under sections 379 and 668 of the Code. The late cases of Hill v. Lumber Co., 113 N.C 173, 18 S.E. 107, and Foundry Co. v. Killian, 99 N.C. 501, 6 S.E. 680, are cited as direct authority for such contention. If it has been adjudged by this court that such is the law, every consideration in favor of the stability of judicial decision demands, except in the face of manifest error, that we should abide by it. This leads us to inquire what was decided in Hill v. Lumber Co. The question there was as to the validity of a preference made in favor of a director of an insolvent corporation. His duties and liabilities, as one occupying a fiduciary relation to the stockholders and creditors, were there discussed, and the language of the opinion delivered is to be understood in its application to the facts of that case. In the examination and decision of appeals, we are confined to the questions at issue.

Whatever is written must be taken with reference to its environment and that which, isolated, would be a broad proposition, when considered in connection with the subject-matter under discussion, may be, and generally is, restricted in its meaning. It is the tendency to give further effect than was intended to words used in reference to a particular state of facts, which sometimes confuses the interpretation of the law, and makes that broader and more comprehensive which in its application to the case at bar is simple and plain. Could a director of an insolvent incorporation, who was also a creditor, take advantage of the means of information at his hands, and so protect himself, to the injury of other creditors who were debarred from the same opportunities? Herein was invoked the principles of equity, the relation of trust and confidence borne by the director to all the stockholders, and extended in case of danger of loss to all the creditors; and the broad proposition, so often stated and so often explained in cases like the present, where it was thought to extend its meaning beyond the purposes for which it was used, was laid down that a director is a trustee, first, for the stockholders, and then for the creditors. The present question was in that case not necessary to be and was not decided, and, if it had been in express terms decided, such decision would have been simply a dictum, binding no one further than in its application to the question then before the court. Understood as used and applied in Hill v. Lumber Co. in case of the insolvency of a corporation, and as against the fiduciary in charge of its assets, those assets are a trust fund, and the general creditors are, atleast, entitled to be secured out of the assets upon equal terms with the directors who are also creditors. But, after diligent examination, we find that, by the laws of this state, corporations have never been restrained from the exercise of preference in favor of creditors, not corporators, further than individual persons are, subject, of course, in both instances, to the controlling principles of the statute of frauds that these preferences must not be made with a purpose to defeat, delay, or hinder other creditors or parties in interest. We may here say that the expression used in Hill v. Lumber Company that creditors have a lien upon the assets was a quotation from 2 Story, Eq. Jur. § 1252, where the word "lien" is explained to mean simply a right of priority of payment in preference to any of the stockholders in the corporation.

The case of Foundry Co. v. Killian, 99 N.C. 501, 6 S.E. 680, presented one single question,--the liability to creditors of corporations of the stockholders thereof, to the extent of their unpaid subscriptions; and the decision there was founded upon the principle that the property, including the capital stock, paid and unpaid, constitutes a fund for the benefit of creditors; "that the capital stock of a corporation is a trust fund, to be preserved for the benefit of corporate creditors." Our laws provide for the appointment of a receiver of an insolvent corporation, or one in imminent danger of insolvency. This appointment is to be made on application of any creditor, stockholder, or member of such corporation. Code, § 668, as in Killian's Case. And, when the receiver shall have collected the assets, he is required to pay all the debts if the funds shall be sufficient, and, if not sufficient, to distribute the same ratably among all the creditors who shall prove their claims. When once the court of equity, through its receiver, takes charge of the assets, they are to be distributed pro rata among the creditors, subject to such priorities as have already accrued. It is provided in section 685 that corporations may convey by deed, but that such conveyance shall be void as to existing creditors, etc., provided proceedings to enforce such claims be commenced within 60 days after the registration of said deed. The converse of this provision is, if no creditor or party injured brings his action within 60 days, his remedy fails, and the conveyance is good. Thus, a conveyance by an insolvent corporation, not forbidden by the statute of frauds, is good, unless some creditor or party injured objects within 60 days. These corporations, creatures of the statute, artificial persons, under the direction of the legislature, have all the rights and liabilities, generally speaking, of individual persons. Before the passage of the amendment to the act of 1798, we think, by the act of 1872 (now section 685, of the Code), a corporation might convey land, etc., by deed executed according to the statute or the common law. The amendment added the provision that any such conveyance should be void as to pre-existing debts and torts, "provided such creditors or persons injured shall commence proceedings, etc., within 60 days after the registration of said deed, as required by law." The effect of this amendment is not to make void such deeds as against creditors and persons injured unless proceedings are begun in 60 days. This has been expressly decided in Blalock v. Manufacturing Co., 110 N.C. 99, 14 S.E. 501, which was cited with approval in Hill v. Lumber Co. This question, then, is settled in North Carolina against the contention of the appellees and the judgment of his honor below.

The meaning of the words "trust fund," as used in this connection, is to be explained, as it has been many times in other courts, not strictly a trust to be administered in the first instance upon the insolvency of the corporation for the benefit of all the creditors pro rata; but whenever proceedings under the statute are had, and the court takes charge of the assets, through its receiver, it will make equitable distribution, among all the creditors, of all the assets not subject to prior liens or rights. Until such jurisdiction takes hold of the assets, they are subject to the action of the individual creditors, and such preferences may be made by the corporation as a natural person might make under the same circumstances of insolvency. The present exigency will not permit us to notice the many authorities adduced by the learned counsel in support of the contrary doctrine. We must content ourselves with a reference to the language used in Hollins v. Iron Co., 150 U.S. 371, 14 S.Ct. 127, in reference to the ordinary meaning of these words "trust fund" in the present connection: "While it is true language has been frequently used to the effect that the assets of a corporation are a trust fund held by the 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. § 1046, they are not, in any true and complete sense, 'trusts,' and can only be called so by way of analogy or metaphor." After reviewing many cases in that court where these words are used or explained, the court proceeds: "A party may deal with a corporation in respect to its property in the same manner as with an individual owner, and with no greater danger of being held to have received into its possession property burdened with a trust or lien. The officers of a corporation act in a fiduciary capacity in respect to its property in their hands, and may be called to an account for fraud, or sometimes even mere mismanagement in respect thereto. As between itself and its creditors, the corporation is simply a debtor, and does not hold its property in trust, or subject to a lien in their favor, in any other sense than does an individual debtor. The assets of such a corporation [an...