Schufeldt v. Smith

• Decision Date: 26 November 1895
• Parties: Schufeldt et al. v. Smith et al., Appellants
• Court: Missouri Supreme Court

31 S.W. 1039

131 Mo. 280

Schufeldt et al. v. Smith et al., Appellants

Supreme Court of Missouri, First Division

November 26, 1895

Appeal from Buchanan Circuit Court. -- Hon. H. M. Ramey, Judge.

Reversed and remanded.

Huston & Parrish, S. S. Brown and H. K. White for appellants.

A corporation in the transaction of its business, though embarrassed, can convey its assets by way of deed of trust making a preference among its creditors. 2 Kent's Com 315, note g., and also 281; Cook on Corp. [2. Ed.] 691. Angell & Ames on Corp. [11 Ed.] 187; 1 Beach on Priv. Corp 358; 2 Potter on Corp. 695; Burrill on Assignments [5 Ed.], 64; St. Louis v. Alexander, 23 Mo. 483; Kitchen v. Railroad, 69 Mo. 224; Shockley v. Fisher, 75 Mo. 498; Foster v. Mullanphy Co., 92 Mo. 79; Larrabee v. Bank, 114 Mo. 592; Alberger v. Bank, 27 S.W. 657; LaGrange Butter Tub Co. v. Bank, 27 S.W. 710. (2) The fact that one of the claims preferred was guaranteed by the president of the corporation, and that another was the property of the estate of a decedent of which the president of the corporation was administrator, will not invalidate the deed in any respect. St. Louis v. Alexander, 23 Mo. 483; Foster v. Mullanphy Co., 92 Mo. 79; Buell v. Buckingham, 16 Iowa 284; Hallam v. Hotel Co., 56 Iowa 179; Montreal v. Potts Salt Co., 90 Mich. 345; In re Conway, 4 Ark. 302; Ringo v. Biscoe, 13 Ark. 563; Bank v. Whittle, 78 Va. 739; Hospes v. Car Co., 48 Minn. 174; Catlin v. Bank, 6 Conn. 233; Wilkinson v. Bauerle, 41 N.J.Eq. 635; Whitwell v. Warner, 20 Vt. 425; Gordon v. Preston, 1 Watts, 385; Duncomb v. Railway Co., 84 N.Y. 190; Banking Co. v. Claghorn, 1 Speer's Eq. 545; Gould v. Little Rock, etc., 52 F. 680. (3) Walsh's vote as director was not necessary to order the deed of trust. Two of the directors, Byrne and McGuire, constituted a quorum, and their votes in favor of the deed of trust made it the act of the corporation, even if Walsh's vote in its favor be excluded. Foster v. Mullanphy Co., 92 Mo. 79; Cook on Stockholders, 713; Buell v. Buckingham, 16 Iowa 284. (4) Even if a single director's interest in the claims, one of which he held as administrator, and another of which he had indorsed, rendered the deed as invalid as to those claims, the deed remains good as to the others. Jones on Chattel Mortgages, 336; Hardcastle v. Fisher, 24 Mo. 70; Foster v. Mullanphy Co., 92 Mo. 79; Morris v. Lindauer, 4 C. C. A. 162; Cohn v. Ward, 9 S.E. 41; Riggon v. Wolf, 14 S.W. 922.

Dowe, Johnson & Rusk, Stauber & Crandall, W. P. Hall and Vinton Pike for respondents.

(1) The directors of an insolvent corporation can not be made preferred creditors for unsecured debts. This rule is universal where the vote of the preferred director or directors is necessary to the giving of the preference. Suddath v. Gallagher, 28 S.W. 880; Bridgins v. Bank, 66 F. 9; LaGrange Butter Tub Co. v. Bank, 122 Mo. 154; Hill v. Rich Hill Coal Company, 119 Mo. 9; Roan v. Winn, 93 Mo. 503; Foster v. Planing Mill Co., 92 Mo. 79; Williams v. Jackson Co., etc., 23 Mo.App. 132; Adams v. Milling Co., 35 F. 433 (Mo.) . (2) A corporation is insolvent within the rule as to preferring creditors when its assets are insufficient to pay its debts and it has ceased to do business or is in the act of taking a step which will practically incapacitate it for conducting the corporate enterprise. Corey v. Wadsworth, 11 So. Rep. 35; Dodge v. Mastin, 17 F. 660; 11 Am. and Eng. Encyclopedia, 168, 172; Morse on Banks and Banking, sec. 662; Gluck and Becker on Rec. of Corp., secs. 14, 49; Reid v. Lloyd, 52 Mo.App. 282; State ex rel. v. Koontz, 83 Mo. 323; Eddy v. Baldwin, 32 Mo. 369; Buchanan v. Smith, 16 Wall (U.S.), 277. (3) Directors are charged with knowledge as to the solvency of their corporation. McDaniel v. Harvey, 51 Mo.App. 198; Hopkins App., 90 Pa. St. 69; Sicardi v. Keystone Oil Co., 149 Pa. St. 148; Lory Banking Co. v. Empire Lumber Co., 91 Ga. 624; Corey v. Wadsworth, 11 So. Rep. 35; Jones v. Co., 38 Ark. 25. (4) The execution of a conveyance of all its property by a corporation is a confession of insolvency. Kellogg v. Richardson, 18 F. 71; Finney Gro. Co. v. Miller, 53 Mo.App. 170; Walton v. Bank, 22 P. 142; Tank Line Co. v. Varnish Co., 45 F. 13; Morse on Banks and Banking, sec. 622. (5) Inasmuch as the directors were preferred in the deed of trust, they were disqualified by their self-interest from acting and making such preference as trustees of the corporation. The deed of trust is, therefore, void in toto on account of the disqualification of the directors to act as trustees of the corporation in a matter in which they were personally interested. Suddath v. Gallagher, 28 S.W. 880; Bridgins v. Bank, 66 F. 9; Roane v. Winne, 93 Mo. 503; Foster v. Mullanphy Co., 92 Mo. 79; Williams v. Jackson County, etc., 23 Mo.App. 132; Adams v. Milling Co., 35 F. 433; Tank Line Co. v. Varnish Co., 43 F. 204; 45 F. 7; Duncombe v. Railroad, 84 N.Y. 190. (6) When the corporation became insolvent its assets became ipso facto a trust fund in the hands of its directors for the benefit of its creditors, and the directors were disqualified from dealing with this fund for their own benefit or advantage. It, therefore, follows that the attempt on the part of the directors to authorize the execution by the corporation of the deed of trust in which certain debts of the directors were attempted to be preferred was void. Munson v. Railroad, 103 N.Y. 73; Lamb v. Laughlin, 25 W.Va. 300; Mfg. Co. v. Hutchinson, 63 F. 496; Bradley v. Farwell, 1 Holmes, 433; Adams v. Milling Co., 35 F. 433; Ward v. Davidson, 89 Mo. 445.

Macfarlane, J. Brace, P. J., Barclay, and Robinson, JJ., concur.

OPINION

Macfarlane, J.

This suit is to set aside a certain deed of trust, executed on the eighteenth day of March, 1893, by the James Walsh Mercantile Company, a business corporation, to defendant, J. Francis Smith, as trustee, to secure its creditors in the order therein named. The deed was executed in pursuance of this resolution of the board of directors:

"Whereas, This corporation is unable to meet its obligations as they fall due, though its assets are much more than its liabilities;

"Resolved, That in order to more economically dispose of such portion of its assets as may be necessary to pay its debts than could be done if legal proceedings should be instituted, the corporation convey all its property, real, personal, and mixed, to J. Francis Smith, as trustee, with powers of sale and collection, and that such trustee pay, first, costs of the trust; second, debts preferred by the state laws of Missouri; third, obligations for borrowed money not secured by collateral; fourth, balance due on notes for borrowed money secured by collateral after application of collateral and their proceeds; and notes of other parties discounted by the company, after due attempt to collect from makers; fifth, other indebtedness of the company not disputed."

The deed of trust was drawn in accordance with the resolution. The creditors of the various classes, with the amounts due each, were specified and directions were given the trustee to pay the debts in the order named. The debts of the third class as specified in the mortgage aggregated about $ 35,000, and those of the fourth class about $ 56,000. The fifth class of creditors secured were the general mercantile creditors of the corporation. The debts of this class aggregated about $ 30,000. Creditors of this class prosecute this suit. Pending the suit, defendant Smith was appointed receiver. The face value of the assets amounted to about $ 300,000 but on account of depreciation it was thought by the receiver that not more than $ 100,000 could be realized on them. There would be, therefore, but little, if anything, to apply on the fifth class of debts. Under the deed of trust, power of sale was given the trustee, as also authority to collect the debts due the company.

It was charged in the petition "that certain of the indebtedness in preferred classes three and four, is the individual indebtedness of the officers and directors of said corporation, and was contracted for the purpose of protecting the individual liability of said officers and directors."

Defendant Smith, by answer, admitted the execution and delivery of the deed of trust, and that by virtue of the powers thereby conferred he took into his possession all the property so assigned to him with a view of administering the same. The other allegations of the petition were in substance denied.

The only evidence offered on the trial was directed to the question of the solvency of the corporation at the time the deed of trust was made.

The records of the corporation showed that James Walsh was its president, Charles McGinn, vice president and John F. Byrne, secretary. It also appears that these were the only directors who passed the resolution. The deed of trust was signed by James Walsh as president, and attested by John F. Byrne, as secretary.

One note, placed in class 3, as described in the deed of trust, was dated January 25, 1883, and was "executed by the former firm of James Walsh & Co., in the sum of $ 12,000, payable to Ferdinand Lutz, of St. Joseph, Missouri, payment of which has been assumed by said party of the first part." Another note of the same character, dated in 1889 for $ 2,000, was also described in the deed of trust. In the same class were two notes by the corporation to James Walsh as administrator of the Conrad estate.

It was not shown by the evidence that the creditor James Walsh, was the same person as James Walsh, the president and director of the corporation; nor was any evidence offered explanatory of the assumption by the corporation of the note of James Walsh & Co. The case was argued by counsel on both sides and the...