Nix v. Miller

• Decision Date: 17 April 1899
• Citation: 26 Colo. 203,57 P. 1084
• Parties: NIX v. MILLER.
• Court: Colorado Supreme Court

57 P. 1084

26 Colo. 203

NIX v. MILLER.

Supreme Court of Colorado

April 17, 1899

Appeal from district court, Ouray county.

Action by J. D. Miller against Charles H. Nix and others. From judgment for plaintiff, defendant Nix appeals. Affirmed.

Henry & Sigfrid, R. D. Thompson, and Harvey Riddell, for appellant.

Storey & Stevens, for appellee.

CAMPBELL C.J.

This action by a judgment creditor of an insolvent corporation whose writ of execution on the judgment was returned nulla bona, was brought against its directors to recover from them the amount of the judgment, on the ground of their wrongful diversion and misapplication of the corporate assets. The judgment below went against two of the directors, one of whom (Charles H. Nix) has appealed.

We are constrained to say that the argument of counsel is somewhat confusing as to the grounds upon which they rely for reversal. In some parts of their brief there is a blending of legal propositions which have no proper connection with each other, and there is much discussion of other points having no bearing upon the merits of this appeal. But, as we understand the argument as a whole, the propositions vigorously maintained by appellant may thus be stated: First, that appellant did not participate in or consent to the alleged frauds of the directors that worked the insolvency of the corporation; second, that if, in law, by inattention to his official duty he may be held to have contributed to the alleged fraudulent acts, they are not of such a character as to entail personal liability upon the director committing them; third, that the alleged frauds were committed before the plaintiff became a creditor of the corporation, and therefore, even if the appellant participated therein, the plaintiff, as a subsequent creditor, cannot call him to account therefor; fourth, that before the plaintiff became a creditor, appellant resigned his office as director, and so cannot be chargeable for any default of the other directors respecting plaintiff's charge of fraud, in so far as it was committed after the time of his resignation; fifth, that he is not liable as a stockholder.

Preliminary to the separate consideration of these propositions, it is well briefly to state the salient facts necessary to an understanding of the case: Previous to July, 1892, the firm of Home & Co., composed of W. S. Home and Charles H. Nix, was engaged in the general merchandise business at the town of Ouray. Being indebted, they conceived the plan of forming a corporation to which to transfer all of the firm property with a view the better to pay off this indebtedness. In accordance therewith, the Ouray Mercantile Company was formed by the members of this firm; they, and two others named by them, becoming the directors; the capital stock consisting of $20,000, which was issued as fully paid up stock; the consideration being the transfer by the firm to it of the firm property, burdened with the indebtedness of the firm which the corporation assumed and agreed to pay. Its business was carried on and purchases made from time to time for a period of eight months, when the corporation, about March 26, 1893, became insolvent, and ceased doing business. The plaintiff sold merchandise to it between the latter part of December, 1892, and the date of insolvency. A judgment against the corporation for the amount of his debt was recovered, and, the execution thereon being returned unsatisfied, the plaintiff brought this action against the directors, charging them with diversion of the corporate property. The court found, as a matter of fact, that the directors had misapplied over $11,000 of the corporate assets, which caused its insolvency, and this insolvency was admitted at the trial.

1. It may be that the record fails to show any direct, positive, and specific fraudulent act of the appellant concerning the corporate business. He himself testifies that practically he gave it no personal attention, but intrusted it entirely to Home and Sparks, his co-directors. That they were guilty of misappropriation of the corporate assets, as the trial court found, the appellant, in discussing this branch of the case, does not controvert; but his defense is that he had nothing whatever to do with such acts, and did not participate therein or consent thereto. It is not every act of a director of a mercantile corporation, whether it be of omission or commission, that entails upon him individual liability for loss to a stockholder or creditor resulting from such act. While the appellant in this case may not be held for knowingly committing a fraudulent act, yet for gross neglect of and inattention to his official duty he may be, and under the facts of this case is, accountable to the plaintiff, as a judgment creditor, just as certainly as if he personally did the act that caused the damage. That his neglect of duty in this direction permitted his co-directors to commit the acts that worked the injury to plaintiff we think entirely clear, and the proof is amply sufficient to uphold the findings of the trial court to that effect.

2. The second point is closely allied with the first, and might well be considered with it. The acts of the directors complained of were nothing more nor less than a diversion of the funds of the corporation from their legitimate channel, and, instead of paying therewith corporate debts, applying them to the payment of the individual debts of one of the directors. We have already decided that appellant's gross neglect of the company affairs enabled the active managing directors of the company to accomplish this fraud. That this misapplication of the corporate property, which is a trust fund for the creditors, instead of paying therewith the corporate indebtedness,--when the necessary result is to make the corporation insolvent, thus rendering creditors unable to collect from it their claims,--is a fraud upon them, for which they may proceed against the directors after fruitlessly exhausting their remedy against the corporation, is too clear for dispute. Tayl. Priv. Corp. (3d Ed.) §§ 616-619, 756-758, et seq.; 3 Thomp. Corp. § 4152, and cases cited; 1 Beach, Priv. Corp. § 257c et seq.; Cole v. Iron Co., 133 N.Y. 164, 30 N.E. 847; Scott v. Depeyster, 1 Edw. Ch. 512. Appellant relies upon Briggs v. Spaulding, 141 U.S. 132, 11 S.Ct. 924, as authority for his position that the acts of the directors here are not actionable. The theory of the bill in that case was that defendants were 'liable, not to stockholders nor to creditors, as such, but to the bank, for losses alleged to have occurred during their period of office because of their inattention.' The defendants were held not liable, but the charges against them were not of the grave and serious character established against these defendants. In the opinion, Chief Justice Fuller thus speaks: 'If particular stockholders or creditors have a cause of action against the defendants individually, it is not sought to be proceeded on here, and the disposition of the questions arising thereon would depend upon different considerations.' The rule he lays down in that case, governing the liability of directors to the corporation, would, however, clearly make these defendants liable, under the facts of this case, while confessedly the duty of directors to creditors is to be determined by a stricter rule.

3. It is held by the highest authority in this country (Graham v Railroad Co., 102 U.S. 148) that the disposal by a corporation of any of its property cannot be questioned by any of its subsequent creditors. Other authorities might be cited, but this case is controlling. It is upon the ground that the diversion of funds occurred before the plaintiff became a creditor that appellant seeks to escape liability. If the facts of the case at bar brought it within the principle of the authority cited, we would not hesitate to recognize the rule therein announced, because not only is it a sound one, but, in the absence of a controlling rule in our own jurisdiction (of which there is none), we would be inclined to follow the decision of the august tribunal from which it emanated. Whether, as contended by appellee, the character of the action in this case is different in kind from the principal case, or whether it is, as claimed by him, one merely to compel an accounting of a trust fund, is not important; for, conceding that the two are of the same class, there is enough in the facts of the pending action, as set out in the findings of fact, which the record supports, to differentiate this case from that, in this: that the fraudulent acts here complained of were clearly intended to operate as a fraud upon subsequent creditors, and of necessity, as the directors must have known, could have no other effect. So that this case falls within the exception to the general rule that subsequent creditors may not question a fraudulent disposition of their debtor's property made before the relation of creditor and debtor existed, and is brought within...