Minnesota Thresher Manufacturing Company v. Same
| Decision Date | 11 July 1890 |
| Citation | 46 N.W. 310,44 Minn. 37 |
| Parties | Minnesota Thresher Manufacturing Company v. R. B. Langdon. Same v. Thomas Lowry |
| Court | Minnesota Supreme Court |
In each of these cases the plaintiff appeals from an order of the district court for Hennepin county, sustaining a demurrer to the amended complaint.
Orders affirmed.
Flandrau Squires & Cutcheon, for appellant.
Gordon E. Cole, Hiram C. Truesdale, J. N. Castle, and Horace G Stone, for respondents.
While the complaints state two causes of action, yet both are for the recovery of the same thing, to wit, dividends declared and paid to the defendant stockholders by the Northwestern Manufacturing & Car Company, a manufacturing corporation, no part of which had been earned, and which were therefore, just so much of the capital withdrawn and refunded to the stockholders; the corporation being then, as alleged, insolvent. The dividends were paid between May 10, 1882, and May 10, 1884, while the corporation was still an active and going concern. In May, 1884, in an action commenced by Hospes, one of its creditors, (41 Minn. 256, 43 N.W. 180,) the corporation was adjudged insolvent, and all its assets and business sequestered, and placed in the hands of a receiver, pursuant to Gen. St. 1878, c. 76. It appears from the complaint, by implication at least, that this action is still pending, and the receivership not yet terminated. The plaintiff, having become a creditor of the corporation by the purchase of claims against it, filed and proved them in that action, and the same have been allowed by the court. Subsequently the court made an order in that action directing a sale of "all the assets, property, and business of said Northwestern Manufacturing & Car Company" at public auction to the highest bidder, by a referee appointed for that purpose, who of course was a mere aid to, or substitute for, the receiver. While the terms of this order are not more fully set out in the complaint, yet, for the purpose of illustrating what will be said hereafter, it may be stated that it directed all these assets of every description to be sold as one property, and not in parcels, as appears in the Hospes Case, referred to. At this sale the plaintiff became the purchaser, and the court confirmed the sale. The amount realized will not pay the creditors over 10 per cent. of their claims. The plaintiff predicates its right to recover from defendants the dividends referred to on two separate grounds, severally constituting the basis of the two causes of action: First, as a creditor of the corporation pursuant to Gen. St. 1878, c. 34, § 139, which makes the stockholders liable to any creditor to the amount of the capital stock which has been withdrawn and refunded to them before the payment of all the debts of the corporation for which such stock would have been liable; second, as purchaser of the right of action at the receiver's sale, as a part of the assets of the corporation. It must be apparent that these two grounds are inconsistent with each other, and that they cannot both be sound. We will consider them in the order named.
1. The sequestration of the property of a corporation by an adjudication of its insolvency, and the appointment of a receiver of its property and effects, under the provisions of chapter 76, is in the nature of an attachment or execution in behalf of all its creditors. The receiver has substantially the same powers and functions as an assignee in bankruptcy, or a receiver upon a creditors' bill or proceedings supplementary to execution. He succeeds to the rights of the creditors as well as of the insolvent corporation, and has the power to enforce the rights which the creditors, but for the proceedings, might have enforced in their own behalf. The proceedings were intended to provide a complete and full remedy; and this they could not do unless their scope is to apply, to the satisfaction of the creditors, all property which, but for the proceedings, they could have so applied. Farmers' Loan & Trust Co. v. Minneapolis Engine Works, 35 Minn. 543 (29 N.W. 349.) Everything becomes assets in his hands, and hence in the custody of the law, which were assets as to creditors, as well as what was assets as to the corporation. Among the rights which pass to the receiver as the representative of the creditors is the right to recover property conveyed by the corporation in fraud of its creditors, or capital withdrawn and refunded to the stockholders without provision for full payment of the corporate debts. This right of the receiver does not depend upon any express statute granting it, but rests upon the general equitable doctrine that the capital of a corporation is a trust fund for the benefit of its creditors, and that those to whom it has been refunded will be held trustees for their benefit. It follows that a receiver of an insolvent corporation, as the representative of its creditors, can assert many claims against stockholders which the corporation itself could not have maintained. This is clearly contemplated, and even expressly provided for, in the various provisions of chapter 76, relating to such proceedings. Therefore the right of the receiver of the Northwestern Manufacturing & Car Company to recover these unearned dividends paid to its stockholders by the corporation out of its capital cannot be doubted; and it cannot be that this right of the receiver and a right of creditors, each in his own behalf, to maintain actions under section 139 to recover the same thing, can both exist at the same time. If so, it would lead to the worst confusion and conflict, and often defeat the main object of sequestration proceedings under chapter 76. The right of the individual creditor and of the receiver were never intended thus to conflict. When sequestration proceedings against an insolvent corporation have been instituted, all property and choses in action which the receiver may claim or enforce in the right of creditors are as much in custodia legis as those which the corporation itself might have claimed or enforced. The right of action given to the creditor under section 139 was evidently intended to apply only in the case of an active corporation, or one which had not been adjudged insolvent; but the institution of sequestration proceedings disables the creditors to go on, each in his own behalf, to reclaim capital withdrawn and refunded to shareholders in fraud of their rights. That right vests in the receiver, and the rights of creditors must be worked out through him.
We are not unmindful that in Patterson v. Stewart, 41 Minn. 84, (42 N.W. 926,) we held that the fact that the affairs of a corporation had been placed in the hands of a receiver does not take away or suspend the creditors' right of action, under section 142, against the directors. The question was not the prominent one in the minds of the court in that case, our attention being more especially directed to a consideration of the proper form of action, and who were necessary parties; and it must be admitted that the other question did not receive, at least from the writer, the degree of consideration which it perhaps deserved. There may, therefore, be sufficient doubt about the correctness of our decision on that question to entitle it to re-examination, if the point should ever again arise. But there is clearly room for a distinction between the liability of stockholders to account for capital of the corporation which has been withdrawn and refunded to them in fraud of the rights of creditors, and the liability imposed on directors by section 142 for the benefit of particular creditors as a sort of penalty for violations of statute, and which never was any part of the corporate property. Whatever may be said of the latter, we are clear that the right to enforce the former vests in the receiver as trustee for all the creditors, and that the right of the individual creditors to sue under section 139, if not absolutely taken away, is at least suspended during the pendency of the proceedings under chapter 76.
2. We come now to consider whether the right of action to recover these dividends passed to plaintiff by its purchase of the assets and property of the corporation at the sale under the order of the court. The line of argument by which it is sought to maintain the affirmative of this question is substantially as follows: That the payment of unearned dividends by a corporation out of its capital is wholly ultra vires; that therefore the corporation itself might have maintained an action to recover them, and hence the plaintiff can maintain such an action in the right of the corporation by virtue of its purchase of all its property and assets. It becomes important in this connection to consider in what sense, and as to whom, the act was ultra vires. The term "ultra vires" is used in two different senses; first as to the state meaning an act which transcends the powers conferred by law on the corporation, -- something which is not within the scope of the powers of a corporation to perform under any circumstances, or for any purpose, as, for example, where a corporation authorized only to build a railroad engages in banking. This is the primary, and really only proper, sense of the term. But it is also used in a secondary...
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