Peterson v. John J. Reilly, Inc.

• Decision Date: 24 April 1964
• Parties: Abbie M. PETERSON, Ex'x, et al. v. JOHN J. REILLY, INC., et al.
• Court: New Hampshire Supreme Court

Page 21

200 A.2d 21

105 N.H. 340

Abbie M. PETERSON, Ex'x, et al. v. JOHN J. REILLY, INC., et al.

Supreme Court of New Hampshire.

Argued Feb. 5, 1964.

Decided April 24, 1964.

McLane, Carleton, Graf, Greene & Brown, Manchester, Jack B. Middleton and Harkaway & Pappagianis, Nashua (Stanley M. Brown, Manchester, orally), for plaintiffs, Abbie M. Peterson, executrix, Powers Regulator Co., Corriveau-Routhier Inc., C. J., Bosselli, Dorothy C. Spear, executrix, Scovell Wellington & Co. and Bloom, South & Gurney.

Wiggin, Nourie, Sundeen, Nassikas & Pingree, Manchester (John N. Nassikas, Manchester, orally), pro se, and for Warren N. P. Wurm and Marjorie F. Wurm, mortgagees.

Fisher, Parsons, Moran & Temple, Dover (Harold D. Moran, Dover, orally), for Joseph Michael Realty Corp., mortgagee.

James M. Winston, Manchester, Trustee in Bankruptcy (by brief and orally), pro se.

Devine, Millimet, McDonough, Stahl & Branch and Green, Green, Romprey & Sullivan, Manchester (Norman H. Stahl, Manchester, orally), for Lyons Iron Works, Inc., John J. Reilly, Inc. and Thomas F. O'Brien, sheriff.

Emile R. Bussiere, Manchester (by brief and orally), for Bertrand Cote, and Attilio and Gladys Baldini.

King & Nixon, Manchester, for P. H. McGranahan, Samuel A. Margolis, Manchester, for A. W. Therrien Co., Hamblett, Kerrigan & Hamblett, Nashua, for James Linatsas, and Manning & Sullivan, Manchester, for Lane Fearon, furnished no briefs.

DUNCAN, Justice.

The decree in this case determines the relative priority of eighteen claims to the fund in the custody of the Court, on the basis of evidence presented over a period of twelve days of trial. The issues presented, however, lie in comparatively narrow compass. They relate primarily to the status of a second mortgage given to secure the payment of $40,000, referred to as the Wurm mortgage, and a third mortgage given to secure the payment of $75,000 known as the Michael mortgage. Both mortgages were to secure advances made by stockholders, officers, and directors of the mortgagor corporation. At the trial, the plaintiffs contended that neither mortgage was valid against their respective claims. The master ruled that the second mortgage had priority over subsequent attaching creditors to the extent of $9,000 and the third mortgage to the extent of $8,000. This the mortgages contend was error.

The findings and rulings to which the mortgagees excepted can best be understood in the light of factual background concerning the mortgaged property. Certain pertinent facts were found by the master as follows:

'On December 12, 1955 a written agreement was entered into between Mildred A. Gould and Thomas D. Gould as Sellers, and J. N. Anton and Warren N. P. Wurm as Buyers, by the terms of which the Buyers were to acquire all of the outstanding stock of the Rice-Varick Hotel, Inc. for the sum of $108,000. Instead of paying this amount, however, the Buyers agreed to pay down only $7,500 in cash, and the balance was to be satisfied, first, by paying or causing to be made available to the corporation $40,000 for the purpose of settling outstanding liabilities of the corporation on or before February 14, 1956; and, second, by causing the corporation to deliver to the Sellers, notes for the balance of $60,500 to be secured by a first mortgage on real estate of the corporation * * * Transfer was to be completed February 14, 1956.

'Although Joseph Michael Jr. did not sign the agreement it was understood that he was to acquire one-third of the stock, and that Wurm and Anton were each to have one-third.

'The transfer was effected on February 14, 1956, and at a meeting of stockholders of Rice-Varick Hotel, Inc. held on that day, J. Nossiff Anton, Warren N. P. Wurm and Joseph E. Michael were elected directors, the others having resigned, and execution of a note and mortgage to Mildred A. and Thomas D. Gould was authorized. * * * Apparently the liabilities of the corporation at that time were $39,500 instead of $40,000 so the mortgage was given for $61,000. This note and mortgage, which was recorded in Book 1456, Page 420, after various assignments endorsed thereon * * * was, on February 20, 1957, assigned to the Merchant's Savings Bank. No one questions the validity of this mortgage to which the sheriff's sale was made subject, so the holder of the mortgage has no claim to the fund held by the Court.

'Wurm, Anton and Michael then on February 14, 1956 withdrew $7,500 from the corporation to make the down payment on the purchase of the stock * * * so at this point they had acquired an equal interest in all of the stock of Rice-Varick Hotel, Inc. without having invested any of their own money.'

The new stockholders thereafter embarked upon an extensive program of expansion and modernization of the hotel. In October 1956 a new dining room was opened on the first floor, while extensive remodeling continued elsewhere. Eventually financial support was exhausted, disagreements arose among the stockholders, numerous attachments were made late in 1957 and early 1958, the corporation was adjudicated a bankrupt on February 24, 1959, and the hotel was sold on execution on April 6, 1959. Wurm v. John J. Reilly, Inc., 102 N.H. 558, 163 A.2d 13, 86 A.L.R.2d 286.

Renovation of the hotel by the stockholders had been in progress for more than a year when the second mortgage dated and executed on April 1, 1957 and recorded on May 13, 1957, was given to the Wurms to secure the payment of $40,000, the borrowing having been authorized by the vote of the directors on March 28, 1957. Later, on October 15, 1957, a half interest in this note and mortgage was assigned to the Michael Realty Corporation. Joseph E. Michael, Jr. was a stockholder, director, treasurer and clerk of Michael Realty Corporation, as well as of Rice-Varick Hotel, Inc. The master held that the second mortgage was valid only to secure an advance by the Wurms in the amount of $9,000 made under date of March 27, 1957.

The third mortgage was authorized by vote of the directors on September 11, 1957 and given to Michael Realty Corporation and the Wurms purportedly to secure a note of $75,000. It was dated September 12, 1957, and recorded on November 4, 1957. In fact it secured a note for $40,000 payable to the Wurms, and another note for $35,000 payable to Michael Realty Corporation both dated September 12, 1957. It was expressly made subject to the second mortgage. The third mortgage was held valid by the master only to secure advances totaling $8,000 made by Wurm on September 9 and 11, 1957. Although both mortgages provided for interest at a higher rate, the master ruled that interest should be allowed at 6% only.

The claims of three creditors, namely the machanic's lien creditors Lyons and Reilly and the attachment creditor Peterson, were prior in time to the second mortgage and were held to have priority over it. The attachments of all other creditors were subsequent in time to the date of execution of the third mortgage, but the attachments of Linatsis and Powers Regulator were made prior to the recording of that mortgage. However, since the third mortgage expressly provided that it was subject to the second mortgage, the attachments of creditors subsequent in time to the second mortgage, to the extent that they secured claims equal in the aggregate to the amount of that mortgage less $9,000, were held to have priority over the $8,000 security validly furnished by the third mortgage. The remaining attaching creditors, with claims aggregating more than $53,000, were held to have priority over the balances of the second and third mortgages.

The claims thus allowed against the fund, including the $17,000 of mortgage principal indebtedness, but exclusive of interest and costs totaled $128,176.65.

In accordance with established law in this jurisdiction, the master considered that the transactions between the corporation and its directors whereby the interests of the latter were advanced were subject to scrutiny (Rosenblum v. Judson Engineering Company, 99 N.H. 267, 109 A.2d 558) and that if the corporation was insolvent at the time, its assets were a trust fund for its creditors, so that attempted preferences in favor of the directors would be invalid. Smith v. Putnam, 61 N.H. 632; Mica Products Co. v. Heath, 81 N.H. 470, 128 A. 805; Bailey v. Ballou, 69 N.H. 414, 415, 44 A. 114. See 15A Fletcher, Cyc. Corporations (1938 rev. vol.) s. 7469; Boyum v. Johnson, 8 Cir., 127 F.2d 491, 494 (8th Cir. 1942); Woodman v. Butterfield, 116 Me. 241, 248, 101 A. 25.

RSA 545:4 provides: 'Conveyance, by Insolvent. Every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors, without regard to his actual intent, if the conveyance is made or the obligation is incurred without a fair consideration.' 'Fair consideration' is defined by RSA 545:3 II as follows: 'Fair Consideration. Fair consideration is given for property or obligation: * * *

'II. When such property or obligation is received in good faith to secure a present advance or antecedent debt in amount not disproportionately small as compared with the value of the property or obligation obtained.'

The master found, over the contrary contention of the mortgagees that upon the evidence, 'as of April 1, 1957, Rice-Varick Hotel was insolvent within the meaning of RSA 545:2 I, and also within the provisions of the Bankruptcy Act (11 U.S.C.A., s. 1(19)), and RSA ch. 568.' He further found that as of April 1, 1957, the corporation 'could not pay its bills as they matured, and if that test should be applied the corporation was insolvent.'

In reaching this conclusion the master relied upon evidence indicating that the value of the assets of the corporation following its acquisition by Wurm, Michaels, and Anton was 'zero,' evidence indicating that at June 30, 1957 its liabilities exceeded its assets, and evidence that its operations for the...