Pitman v. Chicago Lead Company

• Court: Kansas Court of Appeals
• Writing for the Court: ELLISON, J.
• Citation: Pitman v. Chicago Lead Company, 67 S.W. 946, 93 Mo.App. 592 (Kan. App. 1902)
• Decision Date: 07 April 1902
• Parties: L. PITMAN, Appellant, v. CHICAGO LEAD COMPANY Defendant; G. H. ELMORE, Interpleader Respondent

67 S.W. 946

93 Mo.App. 592

L. PITMAN, Appellant, v. CHICAGO LEAD COMPANY Defendant; G. H. ELMORE, Interpleader Respondent

Court of Appeals of Missouri, Kansas City

April 7, 1902

Appeal from Barton Circuit Court.--Hon. H. C. Timmonds, Judge.

REVERSED AND REMANDED.

Howard Gray, H. W. Currey and Thurman, Wray & Timmonds for appellant.

(1) The conveyance being from the corporation to one of the members of its board of directors, is prima facie fraudulent. State ex rel. v. Rubber Co., 149 Mo. 181. (2) The holder of property, under a conveyance made by a corporation while it is insolvent to one of its board of directors, is required to show, in order to make out prima facie ownership in additin to showing that the conveyance was ordered by the board of directors, and that the consideration was bona fide that the board of directors in making the conveyance acted in good faith. State ex rel. v. Rubber Co., 149 Mo 181; Union Dime Saving Inst. v. Duryea, 67 N.Y. 84. (3) In this case the burden of proof was on the interpleader to show affirmatively that the board of directors of the corporation acted in good faith when they made the bill of sale to Blair. State ex rel. v. Rubber Co., 149 Mo 181; Wright v. Lawson, 51 Minn. 321; Tolbert v. Horton, 31 Minn. 518; Braley v. Byrnes, 25 Minn. 297; McNeal v. Finnegan, 33 Minn. 374; Bank v. Ellis, 30 Minn. 270; Devoe v. Brandt, 53 N.Y. 462; McLoud v. Bank, 42 Miss. 99; Lynch v. Beecher, 38 Conn. 490; Porter v. Parks, 49 N.Y. 564; 8 Am. and Eng. Ency. of Law (1 Ed.), 841, title "Fraudulent Conveyances," sub-title "Burden of Proof." (4) The power of corporations to prefer one of the members of its board of directors is a privilege rather than a strict right, and the parties claiming the privilege must strictly conform to the requirements of the law. Friedburg v. Drefus, 135 U.S. 478. (5) The proof offered by interpleader would have been barely sufficient to have made a prima facie case had he not been a director in the corporation. The fiduciary relation in which a director stands to the corporation has always been recognized in this State, to the extent at least, that all his transactions with the corporations are subject to the closest scrutiny as to their character, consideration and good faith. Lynch v. Beecher, 38 Conn. 490; Porter v. Parks, 49 N.Y. 564; 8 Am. and Eng. Ency. of Law (1 Ed.), p. 841, title "Fraudulent Conveyances," sub-title "Burden of Proof." Patrick v. Boonville Gas L. Co. 17 Mo.App. 462; Lingle v. Ins. Co., 45 Mo. 109; Chouteau v. Allen, 70 Mo. 338; Ins. Co. v. Floyd, 74 Mo. 291. (6) After a corporation becomes insolvent and is no longer possessed of vitality enough to survive and continue its business, and the board of directors conclude that they can go no further then the directors, by that very act, become trustees for the stockholders and creditors and thereafter, in their dealings with the assets of the corporation in which they have any pecuniary interest, the transactions are to be regarded as transactions between trustee and cestui que trust. Tank Line Co. v. Varnish Co., 43 F. 204; 1 Beach on Priv. Corporation, sec. 241; 2 Cook on Cor., sec. 653; Thomas v. Sweet, 37 Kan. 207; Ryan v. Leavenworth, 27 Kan. 398; Hall v. Bridge Co., 8 Kan. 472; Hill v. Frazier, 22 Pa. St. 320; Bridge Co. v. Fowler, 55 Kan. 17; Jones McDowell & Co. v. Ark., Mech., Agri. Co., 38 Ark. 1; Railway v. Poor, 50 Me. 277.

McReynolds & Halliburton and R. G. Blair for respondent.

(1) A corporation has the same right to prefer creditors that an individual has, and though insolvent, may execute an honest preference in favor of one of its creditors to the exclusion of others. And the directors when bona fide creditors stand on a footing as good as general creditors. (2) The transfer of a corporation's property by a deed which makes the directors voting for it preferred creditors, is not invalid for that reason alone. Foster v. Planing Mill Co., 92 Mo. 87; Meyer v. Folding Bed Co., 130 Mo. 188; Schufeldt v. Smith, 131 Mo. 280; Hall v. Goodright, 138 Mo. 576; Butler v. Harrison Land and Mining Co., 139 Mo. 467; State ex rel. v. Rubber Mfg. Co., 149 Mo. 181; Milling Co. v. Burns, 152 Mo. 376. (3) Directors are not trustees for all general creditors alike, nor is their power limited in dealing in good faith with the property by way of preference to one creditor so long as the company, undissolved, holds the title to the property. Alberger v. Bank, 123 Mo. 313; Schufeldt v. Smith, 131 Mo. 280; Butler v. Land and Mining Co., 139 Mo. 477 to 482; State ex rel. v. Rubber Mfg. Co., 149 Mo. 213. (4) There is nothing in the evidence to show that the transfer to Blair was not a good-faith transaction; and a great deal to show it was a good-faith transaction. Blair did not vote on the proposition to sell him the machinery; a majority of the whole board of directors (three out of five) did vote for the proposition and it was carried out in good faith. See authorities cited above. (5) The burden is not on interpleader to show there was no fraud, but is on plaintiff to show fraud and that it was not a good-faith transaction. Mansur-Tebbetts Imp. Co. v. Ritchie, 143 Mo. 610.

OPINION

ELLISON, J.

Plaintiff is an attaching creditor of the defendant corporation and interpleader filed his interplea claiming the property attached by plaintiff. At the close of the evidence for interpleader the trial court refused an instruction directing a verdict for plaintiff, and on the latter refusing to introduce evidence in his own behalf the court rendered judgment for interpleader and plaintiff has brought the case here.

It appears from testimony in interpleader's behalf that the defendant corporation was controlled by a body of five directors, R. G. Blair being one of them, and that he was a creditor of the corporation, for money borrowed, in a balance due him of of $ 1,200. The defendant had met with misfortunes and found itself hopelessly insolvent, owing near $ 30,000 and having assets of near $ 5,000. In this situation of affairs, four of the directors, including Blair, met and ordered sold and conveyed to Blair (he not voting) in payment of $ 1,000 of his claim, substantially all of the tangible property of the corporation. Afterwards, at the same meeting, a general assignment was made. Blair then sold the property to inter-pleader. But as it appears that this was merely formal and that Blair is the real party in interest, we will treat him as the interpleader.

Plaintiff concedes that an insolvent corporation can prefer a creditor even though such creditor is an active director of the corporation. But he insists that the onus is on the director to show that the debt and preference given were bona fide. The interpleader denies this and places the burden on the party attacking the transaction just as it would be in case of a stranger creditor. The law seems to be well settled in this State that a corporation, though insolvent, if in untrammeled possession of its property may, as a sequence of its jus disponendi, prefer a creditor. That though insolvent, the corporate property is not a trust fund to be administered by the directory for the equal benefit of all creditors. And that the fact that the creditor preferred is also a director of the corporation does not prevent, or avoid the preference. Foster v. Mullanphy Planing Mill, 92 Mo. 79, 4 S.W. 260; Alberger v. Bank, 123 Mo. 313, 27 S.W. 657; Milling Co. v. Commission Co., 128 Mo. 473, 31 S.W. 28; Schufeldt v. Smith, 131 Mo. 280, 31 S.W. 1039. The courts in some of the states do not agree to such view; though it meets with approval in others. Among the latter is Pennsylvania: Mueller v. Fire Clay Co., 183 Pa. 450; Cowan v. Plate Glass Co., 184 Pa. 1; Finch Mfg. Co. v. Stirling Co., 187 Pa. 596, 41 A. 294; Creighton v. Scranton Mfg. Co., 191 Pa. 231, 43 A. 134. Nor does the fact that the corporation giving the preference, afterwards on the same day, makes a general assignment, affect the preference. Milling Co. v. Commission Co., 128 Mo. 473, 31 S.W. 28.

So, therefore, notwithstanding the defendant corporation in this case had the legal right to prefer Blair although he was a director, yet the further question is, on whom is the burden of showing, in the first instance the bona fides of the preference? Ordinarily, a fraudulent purpose of a transaction, or its illegality, will not be presumed but must be shown by him who asserts it. Mansur v. Ritchie, 143 Mo. 587, 45 S.W. 634. That, however, is not always the rule. If the relation between the parties, stated broadly, is that of trust and confidence, the presumption is that any act of the agent, or trustee, for his personal benefit, is fraudulent and it will be avoided unless he rebuts the presumption by coming forward and showing the bona fides of the transaction. Such relation exists between trustee and cestui que trust; guardian and ward; attorney and client; physician and patient. Garvin v. Williams, 44 Mo. 465; Bogie v. Nolan, 96 Mo. 85, 9 S.W. 14. The rule is not confined in application to these relations alone. It "finds application commensurate with the existence of confidential relations." It is familiarly known to exist between principal and agent. Street v. Goss, 62 Mo. 226; Story on Agency, secs. 210, 211, 212; Mechem on Agency, secs. 463, 469.

But it has been said that the directors of a corporation are not the agents of the creditors of the corporation--that they are the agents of the stockholders. And it has been said that they are not trustees. Be that as it may, while they are not technically trustees, they are such in the sense that they will not be allowed to take an unfair advantage resulting from their position. They occupy a fiduciary and trust relation. 1 Morawetz on Corp., secs. 516, 517, 518...