Mills v. Hendbrshot

• Decision Date: 23 December 1905
• Citation: 62 A. 542,70 N.J.E. 258
• Parties: MILLS v. HENDBRSHOT et al.
• Court: New Jersey Court of Chancery

62 A. 542

70 N.J.E. 258

MILLS

v. HENDBRSHOT et al.

Court of Chancery of New Jersey.

Dec. 23, 1905.

Action by John M. Mills, as receiver of the P. D. Stephens Company, against Charles B. Hendershot and others. Heard on bill, answers and cross-bills, replication, and proofs. Decree ordered.

Charles Stillwell, Jr., for complainant Elmer King, pro se. Albridge C. Smith, for defendant Hendershot. Joseph Hinchman, for defendant Welsh.

EMERY, V. C. The receiver of an insolvent corporation files this hill against the defendants Hendershot, Welsh, and Downs, three of the four stockholders of the company, and the administrator of the only remaining stockholder, F. D. Stephens, who is deceased. For the purpose of paying the debts of the insolvent corporation a recovery is sought upon three classes of alleged liabilities. Against the two defendants, Hendershot and the administrator of Stephens, the receiver claims the value of goods of the corporation taken by Hendershot and Stephens on a partial division of its assets, made between them after its insolvency, and on an agreement between Hendershot, Welsh, and Stephens, the only officers and directors of the company, for closing up its business and affairs without legal proceedings. The second claim is a several claim against all of the stockholders, including Downs, for the dividends received by them on their respective stock from the year 1895; it being alleged that the company from that time was insolvent, and that the dividends were paid, not out of the profits, but out of the capital of the company. The third claim of the receiver is against the defendants Hendershot and the administrator of Stephens for a return of their respective salaries since the year 1895. The liability to return the salaries is based partly on an agreement (set out in the bill) made prior to the formation of the company between the three proposed stockholders, Hendershot, Welsh, and Stephens, and partly on the claim that, since 1895, the business was continued and their salaries drawn with full knowledge of the insolvency of the company, and that it is liable to the extent of this further depletion of its assets by continuing the business, instead of closing up its affairs, in insolvency or otherwise. The agreement between Stephens, Hendershot, and Welsh was made for the purpose of taking over a general plumbing, heating, and tin-ware business previously conducted by Stephens, and of continuing the business, with its good will, as the F. D. Stephens Company; Stephens contributing stock, plant and good will, for which paid-up stock was to be issued to the amount of $8,000, $5,000 on the formation of the company and $3,000 by subsequent purchase. Hendershot and Welsh each paid in $2,500 in cash for their subscriptions to that amount. As to salaries, the agreement provided that Stephens, as secretary and salesman of the company, and Hendershot, as treasurer and bookkeeper, should each have an annual salary of $1,000, for which each should give his whole time and attention to the business. Welsh, the president was to have no salary as such officer, but was to be paid for other services. The agreement contained these further provisions, on which the claim of the receiver is based: "Said salaries are to be paid from the profits of the business. The stockholders are to be paid a dividend of 10 per cent. before anything is paid in salaries, and next in preference shall be the salary of C. B. Hendershot before any other salaries are paid." The certificate of organization did not refer to this agreement, nor did it contain the agreement in reference to the payment of dividends and salaries. Nor was the agreement referred to or adopted at the first stockholders' meeting to organize the company. But at the first meeting of the stockholders Welsh, Hendershot, and Stephens were elected the three directors, and at the first directors' meeting a resolution was passed that the dividends and salaries should be as specified in the article of agreement, which was placed in the book of minutes of the company. Crossbills are filed by the defendant Stephens' administrator against Hendershot, and by defendant Welsh against both Stephens' administrator and Hendershot. The general object of each cross-bill is to establish against Hendershot a primary liability for the claims made by the receiver, or some of them, if established. This primary liability was claimed at the hearing as arising out of the contract relating to the postponement of salaries to dividends, and it is claimed that by reason of this agreement Hendershot should be held primarily liable for the salaries received, so far as necessary to pay debts, before any decree for the payment of dividends.

The evidence shows the company, whose business had been unprofitable since at least 1897, was in serious financial difficulty in the spring of 1903, and that in August, 1903, the Pierce, Butler & Pierce Company, its largest merchandise creditor, with a claim of about $2,100, was pressing for payment and threatening proceedings in bankruptcy. In consequence of this, and for the purpose of closing up the business without the appointment of a receiver, an arrangement was made by which Hendershot and Stevens, with the consent of Welsh, the president, and the other director, each took over at an appraisement or valuation, stock and goods of the company —Hendershot to the amount of $1,846.48, and Stevens to the amount of $1,530.86. Hendershot, under the agreement for division (which was made in August, 1903), was to pay the purchase price for the goods taken by him, to the Pierce Company on account of their claim, and shortly after making the agreement, and before actually taking the goods or consummating the agreement, Hendershot did, from his own money, pay $1,800 to the Pierce Company on account After this payment disputes arose between the parties in reference to carrying out the agreement, and it was not until September 26, 1903, that Hendershot took the goods assigned to him, and on that date this receipt, signed by Welsh as president, and Stephens as secretary, was put on the inventory or bill of sale of his goods: "Received payment of the F. D. Stephens Co., the same to be applied to account of Pierce, Butler & Pierce Mfg. Co." Stephens was to pay his purchase price of $1,530.86 toward the reduction of notes of the company amounting to $3,000, held by the Clinton National Bank, on which Stephens and Welsh were indorsers. The balance of the stock not taken by Hendershot and Stephens, inventoried at a few hundred dolars, and which neither party desired to take, was to be sold by either of them and applied to the debts of the company. The assets were finally divided and the business taken over about September 26, 1903: Hendershot from that time carrying on the steam-heating business, and Stephens the other business of the company. Hendershot also undertook the completion of the company's outstanding contracts for putting in heaters, and has carried these out, paying the expenses and realizing a small profit, which has been used toward paying some of the company's debts. Hendershot also paid from his own money to the Pierce Company $1,800 on account of their claim, leaving about $300 still due, for which claim has been presented to the receiver. Stephens, although he took possession of the stock assigned to him, did not pay anything therefor, either to the company or by paying the price on the note held by the Clinton Bank or on any other claims. He died in November, 1903, and his estate is insolvent. Some of the goods not taken on the division were in the actual possession of Stephens at the time of his death, and his administrator has sold them, retaining the proceeds in a special account. The Clinton Bank's claim is over $3,700, and other valid claims for over $500 have been presented to the receiver, who has realized from the assets (including the stock not divided between Hendershot and Stephens) less than $600. At the time the assets of the company were taken over by Hendershot and Stephens the company was clearly in an insolvent condition. Its assets were not sufficient to pay its debts, and, the stockholders not being willing to make further advances, its credit was exhausted. The transfer to these two directors was made in contemplation of the company suspending its business by reason of this insolvent condition, and must, so far as the receiver representing creditors is concerned, be considered as having been made in contemplation of insolvency. The transfers were therefore void under the sixty-fourth section of the corporation act (Laws 1896, p. 298, c. 185), and the receiver is entitled to recover from each transferee the value of the property respectively assigned to him. The section saves only bona fide transfers, without notice and for present valuable consideration, and these transfers were in fact substantially arrangements between the stockholders, by which they agreed with each other to prefer two of the creditors by paying to them the money which was due to the company for the equal payment of all its creditors. Had the transfers been made to the creditors direct, they would have been utterly void under the statute, and if arrangements of this kind for disposition of a company's assets, on the brink of insolvency, are to be sustained, the law has been circumvented. The fair value of the property taken is admitted to be the inventory value, and the receiver is entitled to a decree against Hendershot and the administrator of Stephens for the amounts respectively taken, with interest. Hendershot, however, having paid debts of the company in consideration of the assignment, is entitled to be subrogated to the extent of the debts paid, and to have these debts included as part of the claims against the company. If the estate of Stephens, by reason of insolvency, does not satisfy the decree against him, then for the balance both Welsh and...