Regina Music Box Co. v. F. G. Otto & Sons

• Decision Date: 22 December 1903
• Citation: 65 N.J.E. 582,56 A. 715
• Parties: REGINA MUSIC BOX CO. v. F. G. OTTO & SONS et al.
• Court: New Jersey Court of Chancery

56 A. 715

65 N.J.E. 582

REGINA MUSIC BOX CO.

v. F. G. OTTO & SONS et al.

Court of Chancery of New Jersey.

Dec. 22, 1903.

(Syllabus by the Court.)

Bill by the Regina Music Box Company against F. G. Otto & Sons and others. Decree for defendants.

Mr. Seymour, for complainant.

Mr. Wall, for defendants.

STEVENS, V. C. This is a creditors' suit, brought to set aside a mortgage because it is said to have been given by the defendant F. G. Otto & Sons, a corporation, while insolvent or in contemplation of insolvency. If relief be denied on this ground, then it is contended that the mortgage is fraudulent because it was contrived with intent to hinder and delay creditors, and so void as to complainant, under section 12 of the act (Gen. St. p. 1604) to prevent frauds and perjuries.

The material facts are these: On April 1, 1900, the defendant corporation executed a mortgage for $115,000 to the complainants Zenas E. Newall and George R. Turnbull to secure the payment of 115 bonds, of $1,000 each. The mortgagees were to hold the property mortgaged in trust for the equal and proportionate benefit of the respective persons and corporations who should at any time own the bonds. At the time the mortgage was made, the assets of the mortgagor amounted to $477,534.46; the liabilities, to $268,300.73. Among the creditors of the company were the East River National Bank, to which the company was liable to the amount of $55,000 on notes made or indorsed for the benefit of Paillard & Co., and Raymond Jenkins, president of the bank, to whom the company was liable to the amount of $20,000 on notes made or indorsed for the benefit of the same firm. The evidence shows that the corporation of F. G. Otto & Sons and its predecessors had successfully prosecuted the business of manufacturing music boxes and surgical instruments for many years. Among its selling agents was the firm of Paillard & Co. This firm in the spring of 1899 had, it is alleged, through bad management, become very much involved. It had then given over the control of its business to Gustav Otto, the president of P. G. Otto & Sons. It was apparently this that led to the indorsement by the corporation of the Paillard paper to the amount I have already stated ($75,000). On February 13, 1900, Paillard & Co. made an assignment under the New York assignment law. Its liabilities amounted to $110,994.49, and its nominal assets to $144,945.57, but not more than $25,000 have been realized from sales. It has, however, other property, chiefly real estate, of what value does not appear. On the day the deed of assignment bears date there was a special meeting of the board of directors of F. G. Otto & Sons, at which it was resolved "that, in the judgment of this board, it is advisable and most for the benefit of F. G. Otto & Sons, a corporation, that the same should be forthwith dissolved"; and to that end a meeting of stockholders was ordered to be held on March 16th following, but no meeting was in fact held. The resolution had been preceded by a resolution passed on February 9, 1900. It is said in the minutes of that meeting that, in view of the fact that notes were coming due shortly which could not be taken up, Mr. Cooley offered a resolution that the board order a meeting of the board of directors to be called for February 13th for the purpose of taking such action as might be necessary, pursuant to the laws of New Jersey, for the dissolution of the corporation. The stockholders' meeting called at the meeting of February 13th did not, as I have said, take place, there being no quorum present, and the proceedings for dissolution were dropped. They appear to have been discontinued because the company found itself in a position to go on with its business. A statement of its assets and liabilities prepared by an expert accountant of long experience, Mr. Yalden, had been presented by the president of Otto & Sons to the president of the East River Bank. This statement showed assets amounting to $510,200.73, of floating liabilities amounting to $174,532.42, of mortgage indebtedness amounting to $29,500, and of profit and loss amounting to $9,268.31. This statement, however, did not include $55,000 of liability incurred on behalf of Paillard & Co. The president of the bank was so favorably impressed with this showing that he agreed to lend the company, of his own money, $40,000, and to take 40 bonds, to be secured by the mortgage of $115,000; the Otto Company giving to his bank the remaining 75 bonds as security for the Paillard paper which had been protested. The president testifies that he does not remember how the amount of his loan was arrived at, but he says, "That was thought to be a sum that would put them in a very easy-going shape." He paid it in installment between April and October, 1900. The company continued to prosecute their business until May 18, 1903, when the trustees under the mortgage took possession, and have carried on the same business ever since. The evidence is that at no time since the mortgage was made did the company's running expenses exceed their receipts. On the contrary, it appears that a small profit was made. The trustees took possession for the somewhat singular reason (considering the small amount of the complainant's judgments, viz., $3,365.07) that they desired that complainant should not be in a position to levy an execution with effect. The Regina Company and Otto & Sons were competitors in the business of manufacturing music boxes. On January 15, 1900, the former filed its bill in the United States Circuit Court charging Otto & Sons with an infringement of its patent rights. The suit was litigated until March 18, 1902, when a final decree was made against the Otto Company for infringement, awarding damages to the amount of $2,763.55. Two other suits for other infringements had a like termination; the damages awarded on the same day in the one case being $263.81, and in the other $337.71. The executions issued thereon were returned unsatisfied; then alias executions issued, which are still in the hands of the marshal; and thereupon the complainant instituted this proceeding.

The first question to be considered is whether the mortgage of $115,000 was made when the company was insolvent or contemplated insolvency. Section 64 of the corporation act of 1896 (P. L. p. 298), which is a copy of the act of 1895, p. 166, provides as follows: "Whenever any corporation shall become insolvent or shall suspend its ordinary business for want of funds to carry on the same, neither the directors nor any officer or agent of the corporation shall sell, convey, assign or transfer any of its estate, effects, choses in action, goods, chattels, rights or credits, lands, or tenements; nor shall they or either of them make any such sale, conveyance, assignment or transfer in contemplation of insolvency, and every such sale, conveyance, assignment, or transfer shall be utterly null and void as against creditors: provided, that a bona fide purchase for a valuable consideration, before the corporation shall have actually suspended its ordinary business, by any person without notice of such insolvency or of the sale being made in contemplation of insolvency, shall not be invalidated or impeached." This section is identical with section 2 of the old act to prevent frauds by incorporated companies (Rev. St. 1847, p. 129), and must receive the same construction. Frost v. Barnert, 56 N. J. Eq. 291, 38 Atl. 956. It forbids the preference of any creditor after insolvency known or contemplated (Wilkinson v. Bauerle, 41 N. J. Eq. 635, 641, 7 Atl. 514), but does not invalidate a bona fide purchase for value made before the company had actually suspended its ordinary business by a person not having notice.

Complainant's contention is that, at the time the mortgage was made, insolvency existed or was contemplated. Of the $115,000 secured, $40,000 was for cash paid at the time, and $75,000 was for pre-existing indebtedness. As to these there is this distinction: If a company be in fact insolvent, or if it contemplate insolvency, it cannot secure a pre-existing debt, whether the mortgagee have or have not notice. But if the mortgagee advance money to an insolvent company, or to a company contemplating insolvency, and take a mortgage at the time of the making of the advance, then, if he has no notice, his security will stand. In the case at bar it is perfectly manifest that the president of the bank had no notice of insolvency, if we give to the word "insolvency" its ordinary meaning. The carefully prepared Yalden statement showed that the assets were more than double the liabilities, and if to those liabilities we add $55,000, representing the company's liabilities on the Paillard notes, not included in that statement, and deduct the items treasury stock, $21,300, and experimental work, $11,300.27, the statement still shows that the assets exceeded the liabilities by over $200,000. So that the company did not appear to be Insolvent in the sense that its assets were in, sufticient to pay its debts. Nor was it insolvent in the sense that it had suspended its ordinary business of manufacturing, for it was then actually engaged in manufacturing, and it continued to be so engaged for three years thereafter. It is clear, then, that the president had no notice of actual insolvency in either of the senses I have mentioned. It is also clear, as it seems to me, that the president of the bank had no notice that the company contemplated insolvency in either of these senses. To contemplate Insolvency, within the meaning of the act, is to have in mind something more than the mere" possibility of insolvency. The failure of his debtors to make prompt payment, the occurrence of some unexpected event, the stringency of the money market, may create an apprehension in the mind of the manufacturer that he may be unable to meet his obligations as they mature. He may for the moment be doubtful...