The John Miller Company, a Corp. v. The Harvey Mercantile Company, Ltd.

• Citation: 165 N.W. 558,38 N.D. 531
• Decision Date: 14 November 1917
• Court: United States State Supreme Court of North Dakota

165 N.W. 558

38 N.D. 531

THE JOHN MILLER COMPANY, a Corporation, v. THE HARVEY MERCANTILE COMPANY, Ltd., a Corporation; Sayre, Strong Grain & Merchandise Company, a Corporation; Calgary Colonization Company, a Corporation; H. H. Phillips, A. J. Sayre, L. P. Strong, T. L. Beiseker, James T. Morris, Individually and as Trustees for the Corporations hereinafter Named, Creditors of the Harvey Mercantile Company, Ltd., a Corporation; Tibbs, Hutchings, & Company, a Corporation; Empire Cream Separator Company, a Corporation; Marshall Wells Hardware Company, a Corporation; Great Northern Implement Company, a Corporation; Northern Shoe Company, a Corporation; Pure Oil Company, a Corporation; Standard Oil Company, a Corporation; Singer Sewing Machine Company, a Corporation; International Harvester Company, a Corporation; Winston, Harper, Fisher Company, a Corporation; Patterson & Stevenson Company, a Corporation, also Known as T. W. Stevenson Company, a Corporation; Stacy Mercantile Company, a Corporation; F. Mayer Boot & Shoe Company, a Corporation; Twin City Separator Company, a Corporation; Northwestern Bedding Company, a Corporation; Miller, Watt, & Company, a Corporation, Defendants, and GREAT NORTHERN IMPLEMENT COMPANY, a Corporation; Empire Cream Separator Company, a Corporation; Patterson & Stevenson Company, a Corporation; Winston, Harper, Fisher Company, a Corporation; Marshall Wells Hardware Company, a Corporation; F. Mayor Boot & Shoe Company, a Corporation; Northern Shoe Company, a Corporation; Pure Oil Company, a Corporation; Singer Sewing Machine Company, a Corporation; Twin City Separator Company, a Corporation; Stacy Mercantile Company, a Corporation, and James T. Morris, Appellants

Supreme Court of North Dakota

November 14, 1917

Rehearing denied December 14, 1917.

Action to sequestrate the assets of an insolvent corporation.

Appeal from the District Court of Wells County, Honorable J. A Coffey, Judge.

Order for plaintiff overruling demurrers to complaint.

Order affirmed.

Order overruling the demurrer affirmed.

Frank B. Dodge and Frank R. Hubacheck and Edward P. Kelly, for appellants.

If the directors of a corporation have a right to give a preference then their intent is wholly immaterial and no fraud can be predicated thereon. If they acted with fraudulent intent and such was known to the defendants, such knowledge would not be material. Knowledge of the intent of a seller by a purchaser may affect the sale, but not knowledge acquired by a creditor. Lockren v. Rustan, 9 N.D. 43, 81 N.W. 63.

In order that a payment be or constitute a preference, the debtor must be insolvent or must, by the preferential payment, make himself insolvent. Neither of these was effected here. There is no averment of facts sufficient to show the essentials of a preference. 3 Clark & M. Priv. Corp. p. 2365; 1 Cook, Corp. 7th ed. § 9; Corey v Wadsworth, 118 Ala. 488, 44 L.R.A. 766, 25 So. 503; Worthen v. Griffith, 59 Ark. 565, 43 Am. St. Rep 50, 28 S.W. 286; Merced Bank v. Ivett, 127 Cal. 134, 59 P. 393.

"The assets of an insolvent corporation constitute a trust fund for the benefit of creditors only as between creditors and stockholders, and do not constitute a trust fund for ratable distribution among all its creditors, hence such a corporation may prefer a creditor." John V. Farwell Co. v. Sweetzer, 10 Colo.App. 421, 51 P. 1012; Catlin v. Eagle Bank, 6 Conn. 233.

"A corporation may make a general assignment with or without preference." Albany & R. Iron & Steel Co. v. Southern Agri. Works, 76 Ga. 135, 2 Am. St. Rep. 26; State Nat. Bank v. Union Nat. Bank, 168 Ill. 519, 48 N.E. 82.

"An insolvent corporation does not hold its property in trust or subject to a lien in favor of creditors in any other sense than does an individual debtor." Levering v. Bimel, 146 Ind. 545, 45 N.E. 775; Manton v. Seiberling, 107 Iowa 534, 78 N.W. 194; Grand De Tour Plow Co. v. Rude Bros. Mfg. Co., 60 Kan. 145, 55 P. 848; Sargent v. Webster, 13 Met. 497, 46 Am. Dec. 743; Bank of Montreal v. J. E. Potts Salt & Lumber Co., 90 Mich. 345, 51 N.W. 512.

Corporate property is not held in trust in any proper sense of the term. Absolute control and power of disposition are inconsistent with the idea of a trust. Hospes v. Northwestern Mfg. & Car Co., 48 Minn. 174, 15 L.R.A. 470, 31 Am. St. Rep. 637, 50 N.W. 1117; Sells v. Rosedale Grocery & Commission Co., 72 Miss. 590, 17 So. 236; Pullis v. Pullis Bros. Iron Co., 157 Mo. 565, 57 S.W. 1095.

To the same effect are the following authorities: Teitig v. Boesman Bros. & Co., 12 Mont. 404, 31 P. 371; M. A. Seeds Dry-Plate Co. v. Heyn Photo-Supply Co., 57 Neb. 214, 77 N.W. 660; Thomson-Houston Electric Light Co. v. Henderson Electric Light Co., 116 N.C. 112, 21 S.E. 951; Moller v. Keystone Fibre Co., 187 Pa. 553, 41 A. 478; Weyeth Hardware & Mfg. Co. v. Jones-Spencer-Bateman Co., 15 Utah 110, 47 P. 604; Pyles v. Riverside Furniture Co., 30 W.Va. 123, 2 S.E. 909; Hinz v. Van Dusen, 95 Wis. 503, 70 N.W. 657; Conway v. Smith Mercantile Co., 6 Wyo. 468, 46 P. 1084; Hollins v. Brierfield Coal & I. Co., 150 U.S. 371, 37 L.Ed. 1113, 14 S.Ct. 127; American Exch. Nat. Bank v. Ward, 55 L.R.A. 356, 49 C. C. A. 611, 111 F. 782; 5 Thomp. Corp. § 6492.

Pierce, Tenneson, & Cupler, for respondent.

There was a preference here, and it was an unlawful one--a scheme designed by the stockholders, directors, and certain creditors, to wholly defeat the plaintiff's claim.

The scheme was to wind up the business of the corporation, and if it was then insolvent such scheme rendered it so. Comp. Laws 1913, §§ 4541-4544, 4557, 4560, 4565, 4567, 4568, 7968, subds. 2, 5, 7989-8013; N.Y. Consol. Laws, chap. 23, §§ 100-115, 130-136.

The assets of a corporation are a "trust fund" for the benefit of the creditors and the stockholders in the order named, the moment the corporation becomes insolvent. 10 Cyc. 1246, 1249; 2 Morawetz, Corp. §§ 780 et seq.; 5 Thomp. Corp. §§ 6492, and 6496; 3 Clark & M. Priv. Corp. § 780; Ford v. Plankinton Bank, 87 Wis. 370, 58 N.W. 766; Adams & W. Co. v. Deyette, 8 S.D. 119, 31 L.R.A. 497, 59 Am. St. Rep. 751, 65 N.W. 471; Furber v. Williams-Flower Co., 21 S.D. 228, 8 L.R.A. (N.S.) 1259, 111 N.W. 548, 15 Ann. Cas. 1216; 3 L.R.A. Ex. Anno. (vols. 1-70), p. 1045; Buck v. Ross, 68 Conn. 29, 57 Am. St. Rep. 61, 35 A. 763; Sabin v. Columbia River Lumber & Fuel Co., 25 Ore. 15, 42 Am. St. Rep. 756, 34 P. 692, 35 P. 854; Larrabee v. Franklin Bank, 35 Am. St. Rep. 774 and note, 114 Mo. 592, 21 S.W. 747; 8 Thomp. Corp. p. 679; Adam Roth Grocery Co. v. Hotel Monticello Co., 148 Mo.App. 513, 128 S.W. 542; Brown v. Wilmington & B. Leather Co., 9 Del.Ch. 39, 74 A. 1105.

"The corporate assets are converted into a 'trust fund' for the benefit of creditors, where the corporation has ceased to do business or to exercise its franchises." 8 Thomp. Corp. p. 681; Voightman & Co. v. Southern R. Co., 123 Tenn. 452, 131 S.W. 982, Ann. Cas. 1912C, 211.

The "trust fund" doctrine applies in some jurisdictions to a corporation which has ceased doing business. Harle-Hass Drug Co. v. Rogers Drug Co., 19 Wyo. 35, 113 P. 791, Ann. Cas. 1913E, 181.

"A preferential deed of trust executed by a private trading corporation after its insolvency, ceasing to carry on its business without any intention of resuming business, is void as against unsecured creditors." Lyons-Thomas Hardware Co. v. Perry Stove Mfg. Co., 22 L.R.A. 802, and note, 86 Tex. 143, 24 S.W. 16.

A corporation may be deemed insolvent when it is unable to meet its pecuniary obligations as they mature. Benner v. Scandinavian American Bank, 73 Wash. 488, 131 P. 1149, Ann. Cas. 1914D, 702, 706; 4 Clark & M. Priv. Corp. § 780C; Miller v. Gourley, 65 N.J.Eq. 237, 55 A. 1083; Empire State Trust Co. v. William F. Fisher & Co., 67 N.J.Eq. 602, 60 A. 940, 3 Ann. Cas. 393; American Handle Co. v. Standard Handle Co. Tenn. , 59 S.W. 709, and other cases; Tatum v. Leigh, 136 Ga. 791, 72 S.E. 236, Ann. Cas. 1912D, 216.

There can be no valid preference of a corporate debt due a director or guaranteed by him. 5 Thomp. Corp. §§ 6504, 6520, pp. 5129, 5130; 3 Clark & M. Priv. Corp. §§ 786, 787b, pp. 2411, 2414, 2419; 8 Thomp. Corp. § 6207, p. 683; Buck v. Ross, 57 Am. St. Rep. 60, and note 67, 68 Conn. 29, 35 A. 763; 3 Thomp. Corp. §§ 2951, 2958, 2963, pp. 2109, 2117, 2121, 2122; Bosworth v. Allen, 168 N.Y. 157, 55 L.R.A. 751, 85 Am. St. Rep. 667, 61 N.E. 163.

"The directors of a corporation who distribute all or substantially all of its assets among themselves, the stockholders and favored creditors, to the detriment of its general creditors, are personally liable to refund the amount so distributed, up to the amount of the unpaid debts." Bosworth v. Allen, 168 N.Y. 157, 55 L.R.A. 761, 85 Am. St. Rep. 667, 61 N.E. 163; Darcy v. Brooklyn & N.Y. Ferry Co., 26 L. R.A. (N.S.) 267, and note, 196 N.Y. 99, 134 Am. St. Rep. 827, 89 N.E. 461; White, P. & P. Mfg. Co. v. Henry B. Pettes Importing Co., 30 F. 864; Mills v. Hendershot, 70 N.J.Eq. 258, 62 A. 542; Gilbert v. Finch, 173 N.Y. 455, 61 L.R.A. 807, 93 Am. St. Rep. 623, 66 N.E. 133; McIver v. Young, 144 N.C. 478, 119 Am. St. Rep. 970, 57 S.E. 169; Re National Funds Assur. Co. L. R. 10 Ch. Div. 118, 48 L. J. Ch. N. S. 163; Moxham v. Grant [1900] 1 Q. B. 88, 69 L. J. Q. B. N. S. 97, 48 Week. Rep. 130, 81 L. T. N. S. 431, 16 Times L. R. 34; Hurd v. New York & C. Steam Laundry Co., 167 N.Y. 89, 60 N.E. 327.

"One who receives assets of a corporation upon its dissolution is bound to respond to its creditors to the extent of the assets so received in a suit by them to reach the assets or their value." Williams v. Commercial Nat. Bank, 49 Ore. 492, 11 L.R.A. (N.S.) 857, 90 P. 1012, 91 P. 443; Sharples Co. v. Harding Creamery Co., 78 Neb. 795 11 L.R.A. (N.S.) 863, 111 N.W. 783; ...