Nappanee Canning Co. v. Reid, Murdock & Co.

• Decision Date: 08 October 1902
• Citation: 64 N.E. 1115,159 Ind. 614
• Court: Indiana Supreme Court
• Parties: NAPPANEE CANNING CO. et al. v. REID, MURDOCK & CO. et al.

159 Ind. 614

64 N.E. 1115

NAPPANEE CANNING CO. et al.

v.REID, MURDOCK & CO. et al.

Supreme Court of Indiana.

Oct. 8, 1902.

Dissenting opinion. For majority opinion, see 64 N. E. 870.

HADLEY, J.

It is conceded that this court has adopted the rule that a corporation, while prosecuting its corporate business, though with liabilities greater than assets, may prefer its creditors, as may a natural person, and that such preference may extend to an officer or director of the corporation, when conferred by the vote of a disinterested majority of the board of directors. I am impressed, however, after a thoughtful consideration of the subject, that the rule has been already carried in this state as far as reason and judicial precedent will warrant, and, in so far as it is held in the majority opinion in the case at bar that the directors of an insolvent corporation, in contemplation of its early dissolution, may appropriate the entire assets of the corporation to the exclusive security of their own pre-existing personal liabilities, I am unable to agree with my Brethren, and am constrained to enter my earnest protest. The holding is a step in advance of any previous ruling of this court, is forbidden by the decided weight of authority, as I shall endeavor to show, and invests corporate directors with such temptations and powers for mischief and moral wrong that, if no other existed, it should be denied on the ground of public policy. In support of this view, I am not driven to what is commonly called the “trust-fund doctrine,” -that is, to a line of decision to the effect that upon insolvency equity seizes the assets of a corporation for equal distribution to the creditors,-and no preference can be given to any one. This latter doctrine has been repudiated in this and in most other states of the Union to the extent of recognizing the right of insolvent corporations to prefer their common, unofficial creditors to the same extent, and by the same modes, that an insolvent individual may prefer his. But as to official or director creditors, it is quite as generally held that their position as managing agents gives them such an unequal and unfair advantage over other creditors that they will not be permitted by courts of chancery to profit by their superior knowledge and position in a race of diligence. The position occupied by directors is one of trust, call it what you may. They receive the property of others, act for others, and are accountable to others. They are bound to devote the property intrusted to them exclusively to the purposes of the corporation. Any departure in this is a misappropriation, for which they are answerable to the stockholders or the creditors. The assets not being their own, they hold and administer them primarily for the benefit of the stockholders, secondarily for the use of those who may by contract or operation of law succeed to the interests of the stockholders. While the corporation is solvent, the active fiduciary relation is between the directors and the stockholders, who are the real parties in interest. When insolvency occurs, the stockholders, while retaining the legal title, by force of law part with all beneficial interest in the assets, and the same is transferred to the creditors. The possession and control of the directors being unchanged by the advent of insolvency, they thereafter necessarily hold the property, not for themselves, but in trust for the creditors, who now have the exclusive interest. It at once becomes their duty to apply the assets to the payment of the debts, not necessarily pro rata, because the creditors have no mutual relation among themselves; but they hold the assets in trust for application to the debts, either pro rata or preferentially, as they themselves deem the merits of the creditors to be. The directors, being the corporation for the purpose of judging among the creditors, cannot select themselves from among the creditors for preference, because they cannot be both judges and creditors at the same time. It seems absurd to say that *1116the same persons may constitute different identities of themselves, so that, as directors of a corporation, they may convey, or mortgage, or contract with themselves as private persons. The relation of debtor and creditor implies antagonism, a countervailing interest of distinct and independent parties. The interests of self-preferring creditors are co-operative and the same. The more anxious as a creditor to obtain the preference, the more willing and ready as a debtor to grant it. This puts the director in a situation wholly incompatible with his duty to serve all stockholders and creditors fairly and alike. While not a trustee in a technical sense, there can be no doubt that he occupies such a fiduciary position towards the stockholders and directors as calls for a faithful performance of duty, and conduct entirely free from any use of his position to advance his personal interests beyond those of others of equal merit. We have many American decisions in support of this view, from the more recent of which in the several states, though often not the best considered, I briefly quote: “It seems to be well settled that directors of an insolvent corporation, who are creditors of the company, cannot secure to themselves any preference or advantage over other creditors in the payment of their claims.” Bonney v. Tilley, 109 Cal. 346, 42 Pac. 439, quoted approvingly in Bank v. Ivett, 127 Cal. 134, 59 Pac. 393, decided December 11, 1899. “It is not good morals, or good law.” Fishel v. Goddard (Colo. Sup. July 5, 1902) 69 Pac. 607, 612. “We think it very clear, therefore, that when the validity of these mortgages, to secure debts upon which the directors were indorsers, was questioned by other creditors of the corporation, they should have been classed as instruments rendered void by the legal principle which prevents directors of an insolvent corporation from giving themselves a preference over outside creditors.” Atlas Tack Co. v. Exchange Bank (Aug. 7, 1900) 111 Ga. 703, 710, 36 S. E. 939. “The law is, however, that an insolvent corporation cannot prefer a creditor who at the time is a director therein.” Rockford Wholesale Grocery Co. v. Standard Grocery & Meat Co. (Oct. 24, 1898) 175 Ill. 89, 51 N. E. 642, 67 Am. St. Rep. 205. “In Hays v. Bank, 51 Kan. 535, 33 Pac. 318, it was held that the directors and managers of a corporation, who were creditors of the same, could not prefer themselves, leaving the question undecided as to whether other creditors might be preferred. The ground of that decision is that the directors are agents of the stockholders and creditors, and that their interests as credors would be inimical to their duties as agents. They occupy a fiduciary relation to the creditors and stockholders, and may not take advantage of their superior information and opportunity to gain an advantage over those whose interests they are guarding; nor are they permitted to contract with themselves as they may with third parties.” Plow Co. v. Rude Bros. Mfg. Co., 60 Kan. 145, 150, 55 Pac. 848. “Officers of a corporation, who are also its creditors, cannot lawfully pay their own claims in preference to other creditors when the corporation is...