South Bend Toy Mfg. Co. v. Pierre Fire & Marine Ins. Co.
| Decision Date | 15 August 1893 |
| Citation | 56 N.W. 98,4 S.D. 173 |
| Parties | SOUTH BEND TOY MANUF'G CO. et al. v. PIERRE FIRE & MARINE INS. CO. et al. |
| Court | South Dakota Supreme Court |
Syllabus by the Court.
1. The capital stock of every corporation is a trust fund for the payment of its debts, and its creditors have the right of priority of payment over any stockholder.
2. Judgment creditors of a corporation may sustain an action as in equity to reach and apply concealed assets or misappropriated property, the same as against individual debtors; but, where a receiver for such corporation is duly appointed, the right to bring such action passes to him.
3. Proceedings supplementary to execution, under section 5174 et seq., Comp. Laws, are available against a corporation.
Appeal from circuit court, Hughes county; H. G. Fuller, Judge.
Action in the nature of a creditors' bill by the South Bend Toy Manufacturing Company and others against the Pierre Fire & Marine Insurance Company and others. From a judgment for defendants on demurrer to the complaint, plaintiffs appeal. Affirmed.
Dillon & Holmes, for appellants. Loring E. Goffy and Coe I Crawford, for respondents.
The plaintiffs, now appellants, are judgment creditors of the Pierre Fire & Marine Insurance Company, a corporation of this state, whose organization is conceded. The action is in the nature of a creditors' bill, and is brought in behalf of these plaintiffs and all other creditors who may choose to come in and seek relief by it. The defendants, respondents here, are said insurance company and parties alleged to have been holders of the capital stock, except defendant Coon, who is alleged to have possession of assets of the company under a void appointment as receiver. The complaint alleges that upon each of plaintiffs' judgments executions have been returned wholly unsatisfied, and that said company is insolvent. It further alleges that each of said defendants except Coon, subscribed for and received a certain number of the shares of the capital stock of said corporation, stating particularly the amount so taken and held by each; that some of said defendants, naming them, paid in full for their said stock, and that others, naming them, paid 12 per cent. of the amount of their said stock, and made and delivered to the company mortgages on real estate to secure the other 88 per cent.; that subsequently all of said defendant stockholders with a full knowledge that said company was insolvent, and for the purpose of avoiding liability thereon, conveyed said stock each to an irresponsible transferee, naming him in each case, whose insolvency was fully known to such defendant at the time; and that afterwards, through fraudulent collusion with the officers and directors of said company, and with knowledge that the company had debts outstanding that it was unable to pay, and after suits were commenced against it by these plaintiffs, the said defendants withdrew from the moneys and assets of said company the several amounts which they had so paid for and on their said stock, and so fraudulently withdrew the securities which they had given said company as aforesaid to secure the amounts unpaid on their stock. The complaint further alleges that two of said defendants, naming them, as secretary and treasurer of said company, respectively, still held and concealed large amounts of money which they had collected for, and which belonged to said company, and were rightfully a part of its assets; and, further, that said last-named defendants had fraudulently and unlawfully obtained a judgment in their favor against said company, upon which they had caused execution to issue, which was returned unsatisfied; and that, in proceedings supplementary to such execution, they had procured from the circuit court, under whose order said proceedings were had, an order appointing said defendant Coon receiver of all the property, real, personal, and equitable, of the said insurance company; but that said receiver had never properly qualified as such, but had filed his report representing that said company had no available assets of any kind. The defendants demurred to the complaint, on the grounds, among others, that there is a defect of parties plaintiff and defendant. The trial court sustained the demurrer, and the plaintiffs appealed.
Respondents contend in support of the demurrer that, a receiver having been appointed, as shown by the complaint, the action could only be maintained by him, and that he should have been plaintiff instead of a defendant. Appellants, on the other hand, insist that statutory proceedings supplementary to execution are not available against a corporation debtor, and that, consequently, the appointment of Coon as receiver in such proceedings was void. The question thus presented starts two constituent inquiries: Would the right to pursue these stockholders upon the facts alleged in the complaint pass to a receiver? And, if so, was the order of the circuit court efficacious to make Coon such receiver? It is alleged in the complaint that certain of these defendants had fully paid for the stock for which they subscribed, and received from the company paid-up certificates therefor, which they held from the time of their issue, in September, 1886, until March, 1889, at which time, well knowing the insolvency of the company, and because of that fact, they severally assigned their said stock to irresponsible parties, and at the same time, by collusion with the officers and directors of said company, withdrew and were paid back by the company the several amounts which they had paid upon and for their stock. As to the other of said defendants, except Receiver Coon, it is alleged that each paid in upon his stock 12 per cent. thereof, and gave to the company real-estate mortgages to secure the remaining 88 per cent.; and in the same manner and by the same fraudulent collusion with the officers and directors of said company, and with full knowledge of its insolvency, each withdrew and was paid back the amount so paid on his stock, and each received back, canceled and discharged, the security which he had executed and delivered to the company as aforesaid. This would certainly constitute a fraud upon the creditors of the company. When this money was paid in, and these securities given, they became the funds and assets of the corporation, to which creditors had a right to look and depend upon for payment of their claims against such corporation. The company had no more right to pay it back to those defendants, under the circumstances stated, than it had to convey any other of its property for the purpose of placing it beyond the reach of its creditors, and as to these defendants the principle involved is not different. It would certainly be the right of creditors, upon general principles of equity, to pursue or have pursued in some manner the assets thus fraudulently transferred. It is a plain proposition that the stock and property of every corporation is to be held and regarded as a trust fund for the payment of its debts, and its creditors have the right of priority of payment over any stockholders. This is too elementary to permit the citation of cases. See 2 Story, Eq. Jur. § 1252; Mor. Corp. § 780; Wait, Fraud. Conv. § 117.
There can be no doubt, we think, upon the facts alleged in the complaint, that, but for the appointment of a receiver (which will be noticed further on,) these plaintiffs, as judgment creditors, could have maintained this action in the nature of a creditors' bill. Creditors of a corporation may sustain a bill of equity to reach and apply concealed assets or misappropriated property the same as against individual debtors. Wood v. Dummer, 3 Mason, 308, was a suit in equity by the unpaid creditors of a bank against its stockholders, on the ground that the bank, while insolvent, had divided three-fourths of its capital stock among the defendants, leaving these creditors' claims unpaid. Justice Story decided that the defendants were liable to refund so much of...
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