Sutton Mfg. Co. v. Hutchinson

• Decision Date: 01 October 1894
• Docket Number: 159.
• Citation: 63 F. 496
• Parties: SUTTON MANUF'G CO. v. HUTCHINSON.
• Court: U.S. Court of Appeals — Seventh Circuit

63 F. 496

SUTTON MANUF'G CO. v. HUTCHINSON.

No. 159.

United States Court of Appeals, Seventh Circuit.

October 1, 1894

[Copyrighted Material Omitted]

Addison C. Harris and J. E. McCullough, for appellant.

John S Duncan and Charles W. Smith, for appellee.

Before HARLAN, Circuit Justice, JENKINS, Circuit Judge, and BUNN Circuit Judge.

HARLAN Circuit Justice.

On the 25th day of July, 1891, in the forenoon, the Hopper Lumber & Manufacturing Company, a corporation of Indiana, filed for record a mortgage to the Sutton Manufacturing Company, a corporation of Michigan, covering the entire stock of the mortgagor company, and every article and thing in or about its lumber and coal yard and used in its business.

The mortgage was given to secure the payment of drafts of different amounts drawn at different times between May 21, 1891 and July 23, 1891 by the Hopper Lumber & Manufacturing Company on the Sutton Manufacturing Company. These drafts aggregated $18,000, and were accepted by the latter company solely for the accommodation of the drawer. They were all negotiated and transferred, but none of them had matured when the above mortgage was executed.

At the time the mortgage was given, the Hopper Lumber & Manufacturing Company was insolvent, its liabilities exceeding its assets by about $40,000. The fact of its insolvency was then known or ought to have been known to its president, who acknowledged the mortgage, and, it is to be presumed, was known or ought to have been known to his codirectors. And the record leaves no room to doubt that the grantor intended to suspend all further prosecution of its business immediately upon executing the mortgage.

During the afternoon of the same day the Hopper Lumber & Manufacturing Company executed and filed for record a deed of assignment conveying to William B. Hutchinson all of its property of every kind and nature, in trust to be sold and disposed of by him; the proceeds, after paying the costs of the deed of assignment and the lawful expenses of executing the trust, to be applied ratably to creditors of the mortgagor company.

The deed of assignment purports upon its face to have been made because of the inability of the mortgagor company to meet the demands of its creditors.

At the date of the mortgage, James S. Hopper, Henry S. Hopper, and Fannie E. Hopper were the directors, James S. Hopper the president and treasurer, and Henry S. Hopper the secretary, of the mortgagor company; and James S. Hopper, Henry S. Hopper, and Benjamin F. Sutton were the directors, James S. Hopper the president, Benjamin F. Sutton the vice president, and Henry S. Hopper the secretary and treasurer of the Sutton Manufacturing Company.

Of the 600 shares of the stock of the Hopper Lumber & Manufacturing Company of the par value of $25 each, James S. Hopper held at the time of executing the mortgage 510 shares, Henry S. Hopper 30 shares, Mrs. Elizabeth Sutton 40 shares, and Mrs. Fannie E. Hopper 20 shares; and of the 1,000 shares of the Sutton Manufacturing Company of the par value of $25 each, Mrs. Sutton held 220 shares, Mrs. Fannie E. Hopper 259 shares, Benjamin F. Sutton 204 shares, Walter A. Hopper 120 shares, Henry S. Hopper 120 shares, Mary J. Adams 76 shares, and James S. Hopper 1 share.

James S. Hopper is the husband of Fannie E. Hopper, a daughter of Mrs. Elizabeth Sutton and a sister of Benjamin F. Sutton and Mary J. Adams. Walter A. Hopper and Henry S. Hopper are sons of James S. Hopper by a former wife, who was a sister of Fannie E. Hopper and a daughter of Elizabeth Sutton.

Some question was made in the pleadings whether the mortgage was in fact accepted before the filing for record of the deed of assignment to Hutchinson. While that point is not deemed vital in the case, it may be well to state that, in the answer of the Sutton Manufacturing Company to an amended bill of complaint, it is averred that at the time the mortgage was executed, 'to wit, before 9 o'clock a.m. on the 25th day of July, 1891, the same was then and there unconditionally delivered, and all control over the same surrendered, by the Hopper Lumber & Manufacturing Company to Henry S. Hopper, the secretary and treasurer and financial agent and manager of said company, the said Henry S. Hopper, then and there full authority, for and on behalf. ' It thus appears that the mortgage was surrendered by the Hopper Lumber & Manufacturing Company, represented in part by Henry S. Hopper, a director and its secretary, to Henry S. Hopper, a director and the secretary, treasurer, financial agent, and manager of the Sutton Manufacturing Company; and, on behalf of the mortgagee company, he 'then and there' accepted the mortgage from the mortgagor company, in part represented by himself as a director and stockholder. The active parties in this transaction do not seem to have been neglectful of any matter of form.

The present suit was brought by Hutchinson, as assignee under the deed of assignment, to obtain a decree declaring the mortgage void as to him and the general creditors, in which event the property embraced by it would belong to him for administration under that deed.

On the authority of Lippincott v. Carriage Co., 25 F. 577, and Howe v. Tool Co., 44 F. 231,-- both of which cases were decided by Judge Woods,-- the circuit court, the district judge presiding, entered a decree setting aside the mortgage.

We are of opinion that there was no error in the decree. It is quite true that the property of a private corporation is not charged by law with any direct trust or specific lien in favor of general creditors; and such a corporation, so long as it is in the active exercise of its functions, may, if not restrained by its charter or by statute, exercise as full dominion and control over its property, having due regard to the objects of its creation, as an individual may exercise over his property. But when it becomes insolvent, and has no purpose of continuing business, the power to sell, dispose of, and transfer its estate is not altogether without limitation.

In curran v. State, 15 How. 304, 307, the supreme court of the United States said that the assets of an insolvent banking corporation 'are a fund for the payment of its debts. If they are held by the corporation itself, and so invested as to be subject to legal process, they may be levied on by such process. If they have been distributed among stockholders, or gone into the hands of other than bona fide creditors or purchasers, leaving debts of the corporation unpaid, such holders take the property charged with the trust in favor of creditors, which a court of equity will enforce, and compel the application of the property to the satisfaction of their debts. This has been often decided, and rests upon plain principles. ' So, in Drury v. Cross, 7 Wall. 299, 302, in which case it appeared that a corporation had conveyed its property so as to protect its directors against liability as indorsers for it, the court, in condemning the conduct of the directors, held that it was their duty 'to administer the important matters committed to their charge for the benefit of all parties interested, and in securing an advantage to themselves not common to the other creditors they were guilty of a plain breach of trust. ' Subsequently, in Graham v. Railroad Co., 102 U.S. 148, 161, the court, after observing that a corporation, if not forbidden by its charter, could hold property as absolutely as an individual could hold property, and that its estate, interest, and possession were the same, said that:

'When a corporation becomes insolvent it is so far civilly dead that its property may be administered as a trust fund for the benefit of its stockholders and creditors. A court of equity, at the instance of the proper parties, will then make those funds trust funds which, in other circumstances, are as much the absolute property of the corporation as any man's property is his.'

And in Railway Co. v. Ham, 114 U.S. 587, 594, 5 Sup.Ct. 1081, the language of the court was:

'The property of a corporation is doubtless a trust fund for the payment of its debts, in the sense that when a corporation is lawfully dissolved and all its business wound up, or when it is insolvent, all its creditors are entitled in equity to have their debts paid out of the corporate property before any distribution thereof among the stockholders.'

See, also, Koehler v. Iron Co., 2 Black, 715; Richardson's Ex'r v. Green, 133 U.S. 43, 44, 10 Sup.Ct. 280.

There is nothing in Hollins v. Iron Co., 150 U.S. 371, 382, 14 Sup.Ct. 127, to which appellant calls attention, that is at all inconsistent with these principles. On the contrary, the court, while reaffirming the doctrine that the property of a private corporation is not burdened with any specific lien or direct trust in favor of general creditors, observed that such a corporation, when it becomes insolvent, holds its assets subject to somewhat the same kind of equitable lien and trust in favor of its creditors that exist in favor of the creditors of a partnership after becoming insolvent, and that in each case such lien and trust will be enforced by a court of equity in favor of creditors.

It is we think, the result of the cases that when a private corporation is dissolved or becomes insolvent, and determines to discontinue the prosecution of business, its property is thereafter affected by an equitable lien or trust for the benefit of creditors. The duty in such cases of preserving it for creditors rests upon the directors or officers to whom has been committed the authority to control and manage its affairs. Although such directors and officers are not technical trustees, they hold, in respect of the property under their control, a...